stats Making the Business of Life Easier

   Finance globeinvestor   Careers globecareers.workopolis Subscribe to The Globe
The Globe and Mail /
Home | Business | National | Int'l | Sports | Columnists | The Arts | Tech | Travel | TV | Wheels


  This site         Tips

  The Web Google


  Where to Find It

Breaking News
  Home Page

  Report on Business



Subscribe to The Globe

Shop at our Globe Store

Print Edition
  Front Page

  Report on Business




  Arts & Entertainment



   Headline Index

 Other Sections

  Births & Deaths






  Facts & Arguments




  Real Estate









  Food & Dining




  Online Personals

  TV Listings/News

 Specials & Series
  All Reports...


   Where to Find It
 A quick guide to what's available on the site



  Customer Service

  Help & Contact Us



 Web Site

  E-Mail Newsletters

  Free Headlines

  Globe Store New

  Help & Contact Us

  Make Us Home

  Mobile New

  Press Room

  Privacy Policy

  Terms & Conditions


How the 2008 meltdown rewrote the crisis playbook for Canada's banks
Today's threats stretch well beyond the boundaries of the financial services sector, risk officers for the four biggest banks say

Email this article Print this article
Monday, September 17, 2018 – Page B1

When Daniel Moore took the call telling him Lehman Brothers was about to fail, he was driving home from Muskoka, Ont., with his wife. It was Sunday, Sept. 14, 2008.

He'd just finished a triathlon and he was tired. "Not as tired as I was going to be," he said.

Mr. Moore's day job was running Bank of Nova Scotia's credit derivatives trading desk, which was suddenly on the front lines of an unfolding financial crisis. Scotiabank had hundreds of millions of dollars of exposure to Lehman, a 158-year-old investment bank, when it filed for bankruptcy.

"As much as people were on tenterhooks," Mr. Moore said, "that was shocking news to everybody."

Canada's asset-backed commercial paper crisis, which had unfolded a year earlier, proved to be a helpful dry run: Most large Canadian banks would ultimately sidestep the worst of the carnage, burnishing their reputations for being steady and sound.

The Globe and Mail spoke to the chief risk officers for Canada's four largest banks - Mr. Moore, TD Bank's Ajai Bambawale, Royal Bank of Canada's Graeme Hepworth and Bank of Montreal's Surjit Rajpal - about how Lehman's collapse set off a chain of events that rewrote the playbook for managing risk - in good times and bad.

Mr. Moore is now Scotiabank's chief risk officer. Looking back, he remembers the "fog of war" as banks scrambled to grasp the full extent of their ties to Lehman and to a dozen or so other institutions whose survival was suddenly in question.

"When the news came out, the activity was frenzied," recalled Mr.Bambawale. In 2008, he was the head of credit risk for the bank's dealer, TD Securities Inc., when he was tapped to lead a SWAT team the bank was assembling to deal with the crisis. TD had about 2,000 trades with Lehman, spread across seven or eight trading desks, that were suddenly left exposed.

So began a routine of 3 a.m. conference calls to work through pressing issues, as well as round-the-clock efforts to grasp the scope of the problem.

Today, that would take a matter of hours, but in 2008, "it probably took a couple of days to put all the reports together, because not everything was automated, so some of the reports had to be manually generated," Mr.

Bambawale said.

MORE STRESS, MORE TESTS No one knows what will cause the next financial crisis. But bankers spend more time than ever dreaming up dire scenarios.

The single most positive outcome from the crisis "is that stress testing got embedded as a necessity in the way people looked at risk," according to Mr.

Rajpal, who was in charge of BMO's debt underwriting in 2008. Stress tests aren't new, but before the financial crisis they were far less numerous or sophisticated. Some are small and routine; Scotiabank runs 150 stress tests daily on its trading portfolios. But the most important ones reverse-engineer scenarios that could hobble the financial sector, telling a story that helps set a bank's overarching strategy and appetite for risk.

"It's now seen as a strategic tool, not just as a regulatory exercise that you're running," Mr.

Bambawale said.

A bank might build a test case in which NAFTA talks fail and a trade war breaks out, fine-tuning models to gauge the impact on unemployment, GDP, house prices and stock markets to estimate its loan losses and the knock-on effects on profits, dividends and capital.

"We've taken stress testing to a whole new level," said Mr. Hepworth, a mathematician by training who has watched the science of risk management mature. Yet, even he knows that "models are very fallible" and measuring risk has a human element.

"In a meltdown situation, your models don't always work," Mr. Rajpal said. All that's left to fall back on are "gut [instincts] and practice."


Banking is still a human endeavour, and the behaviour of bankers drives risk.

Many lenders learned that the hard way in the financial crisis, and in the aftermath "the focus on culture and the importance of it was increased by several notches," Mr. Bambawale said.

That brought about practical changes, such as reviewing compensation structures to discourage undue risk-taking. But it also required a more fundamental shift to get front-line staff in banks' various business lines to see risk managers as partners with useful insight to share, "not just this compliance function with a stick kind of beating on the business," Mr. Hepworth said.

Where culture is concerned, Canadian risk officers often brag that their colleagues are more conservative by nature than their foreign peers.

That may sound cliché, but when Canadian banks were snapping up talent from troubled U.S. banks in the aftermath of the crisis, new hires sometimes "came from a very different culture - very aggressive, very sharp-elbowed," Mr. Hepworth said. When he spoke with new traders, it was apparent which ones would quickly wear out their welcome at RBC.

For Canadian banks, the greater danger may be complacency: After a decade of economic expansion, when loan losses are low and profits are rising, overconfidence is more likely to lead to mistakes, and banks need to be extra vigilant. "You can change capital on a dime. You can change deposits and liquidity on a dime. Culture is people," Mr. Moore said. "I still think we're working on it. I still think we're on the journey."


A risk manager's responsibilities have expanded dramatically over the past decade.

In the pre-crisis era, the risk department's main focus was on credit and markets, defending the bank one loan or trade at a time. When Mr. Hepworth started at RBC, its risk team had about 150 people; now it has 2,500, with teams monitoring risks from cyberattacks, fraud, money laundering, data breaches, inappropriate or unethical conduct and more.

"There are so many non-financial risks lurking around that didn't exist at that time, that are so relevant and weighing on us so heavily today," Mr. Rajpal said.

The risks at issue now stretch well beyond the boundaries of the financial services sector, which has prompted calls for banks to work more closely with governments and even intelligence agencies to spot potential threats. "I think we need to collaborate a lot better," Mr. Rajpal said.

Most banks agree that cybersecurity is now the most serious risk, because threats are hard to predict and constantly evolving.

And as banking shifts increasingly to digital channels, which rely on cloud computing and financial technology partnerships, the weak links that can leave banks and their customers vulnerable are multiplying.

"You realize what risks you can potentially import through a vendor, especially if they are involved with some of your key crown jewels or your assets," Mr.Bambawale said.

"There's going to be a reengineering of a lot of our risk processes for the digital era."

Associated Graphic

Lehmann's collapse in 2008 set off a chain of events that forced Canadian banks to reassess how to manage risk in good times and bad. SAMI SIVA

Huh? How did I get here?
Return to Main Rob_Carrick Page
Subscribe to
The Globe and Mail

Email this article Print this article

space  Advertisement

Need CPR for your RSP? Check your portfolio’s pulse and lower yours by improving the overall health of your investments. Click here.


7-Day Site Search

Breaking News

Today's Weather


Rick Salutin
Merrily marching
off to war
Roy MacGregor
Duct tape might hold
when panic strikes

Where Manley is going with his first budget



For a columnist's most recent stories, click on their name below.


Roy MacGregor arrow
This Country
Jeffrey Simpson arrow
The Nation
Margaret Wente arrow
Hugh Winsor  arrow
The Power Game

Rob Carrick arrow
Personal Finance
Drew Fagan arrow
The Big Picture
Mathew Ingram arrow
Brent Jang arrow
Business West
Brian Milner arrow
Taking Stock
Eric Reguly arrow
To The Point
Andrew Willis arrow

Stephen Brunt arrow
The Game
Eric Duhatschek arrow
Allan Maki arrow
William Houston arrow
Truth & Rumours
Lorne Rubenstein arrow
 The Arts

John Doyle arrow
John MacLachlan Gray arrow
Gray's Anatomy
David Macfarlane arrow
Cheap Seats
Johanna Schneller arrow

Murray Campbell arrow
Ontario Politics
Lysiane Gagnon arrow
Inside Quebec
Marcus Gee arrow
The World
William Johnson arrow
Pit Bill
Paul Knox arrow
Heather Mallick arrow
As If
Leah McLaren arrow
Generation Why
Rex Murphy arrow
Japes of Wrath
Rick Salutin arrow
On The Other Hand
Paul Sullivan arrow
The West
William Thorsell arrow

Home | Business | National | Int'l | Sports | Columnists | The Arts | Tech | Travel | TV | Wheels

© 2003 Bell Globemedia Interactive Inc. All Rights Reserved.
Help & Contact Us | Back to the top of this page