Citi’s Leach on Standardizing Risk Measures, Reducing Derivatives Tail Risk
Brian Leach is chief risk officer of Citigroup. He tells Bloomberg’s Nicholas Dunbar about standardizing risk measures, stress tests and making the foundations of finance safer.
Q: Since the financial crisis, investors have been mistrustful of bank risk disclosures. You and your boss Vikram Pandit have proposed a new way for financial institutions to standardize risk measures. How would that work?
A: To use an analogy, this concept is about defining what a kilogram weighs. Right now, you might say you weigh 150, I might say 150 but one of us is speaking pounds and the other kilograms. The outside world looks at the two disclosures and all it knows is that we both have reported the same number. People don’t know enough about how we reached that number, though, which makes the number too vague to be truly useful. That’s what happens now with capital ratios. Our proposal is that, since you and I don’t know how much the other weighs, we’re going to hand you a sack of flour and ask how much you think it weighs. You’ll say you think it weighs three, and I think it weighs five. Now we have a basis for comparison of how you measure weight because while both are reporting a different number, the bag doesn’t change.