Editor's letter

Systemic failure is a phrase we've heard a lot in recent weeks, whether applied to internal risk management at Societe Generale or the inadequacy of the UK financial regulatory process in the face of the Northern Rock debacle.

We highlighted concerns about investment banks' risk management in November in a feature on remuneration in financial services. It is of course understandable that greater emphasis is placed on income generation than savings, but as the events of January demonstrate, the activities of traders must be monitored - and, on occasion, tempered - by risk managers who actually wield some clout. Conservative elements within a bank will inevitably vex the sales force at times, but occasional tension between departments is preferable to the situation SG finds itself in.

One of the key observations in our November piece was that sell-side compensation should be based on economic capital methodology, rather than solely on performance. Perhaps unsurprisingly, it was an internal credit risk management specialist at a major bank who said institutions should ask how much money traders make relative to the risk they take.

Another question is that of incentives, both in terms of the remuneration available to risk managers - the level of which will determine the calibre of talent attracted to the field - and ways of making traders more keenly aware of the need to protect their respective banks' credit books. No doubt the experience of SG will concentrate minds for a while, but the banks need to demonstrate that the avoidance of excessive risk is a priority for them, alongside maximising returns.