Two-phase risk management program for bank sets best practice standards for the industry
Challenge
A top 20 U.S. bank required McKinsey's help improving the bank's risk management practices after regulators forced the bank to recharacterize several off-balance-sheet transactions, resulting in an earnings restatement of more than $150 million. The stock initially dropped 10 percent. Then, after the Federal Reserve Board and the Office of the Comptroller of the Currency put the bank under watch, the stock dropped another 15 percent.
Discovery
Under Phase 1 of the risk management improvement program, McKinsey created a corporate risk management organization, performed risk diagnostics, and developed an action plan to close the gap to best practice.
Phase 2 involved a number of crucial steps. McKinsey implemented the organization and new governance structures, which included the board level. McKinsey also increased risk transparency through improved reporting measurement and reviews. Importantly, the client's corporate-risk appetite was defined and aligned with business-unit strategies. At the same time, McKinsey created a new credit-portfolio-management function, aligned compensation with the risk program, redesigned risk policies for such things as significant transaction approval, and revamped the management-board interaction process.
Impact
Following the implementation of the risk management improvement plan, regulators declared the bank "well managed," and the CEO acknowledged McKinsey's contributions in the annual report. Wachtell Lipton also cited the bank as an example of risk management best practices.