Understanding the company's risks often results in gaining a deeper understanding of important strategic factors, which again contributes to corporate success. As in sports and law, the key to a good offense is often a good defense. These individuals are charged with developing a comprehensive view of the company's key risks and helping the company develop and implement appropriate risk management techniques. The CRO role has grown out of the risk management functions that are maintained in large financial institutions. It originally addressed the management of financial market risk associated with the institution's trading operations, although over the years it has broadened to include operating risk and, more recently, hazard risk.
Banks are highly leveraged operations.
They finance their purchase of assets, whether those assets are loans or bonds, with borrowed money. The borrowed money comes from deposits, notes issued by the bank, repurchase agreements, commercial paper, etc. Many assets were fixed assets with long maturates, but these assets were financed with short-term borrowing. The crisis that ensued became a powerful motivator for the surviving financial institutions to find better, more reliable ways to mange interest rate risk. What that means is that the bank borrows an amount equal to 92 percent of its assets or, mathematically, almost 12 times its equity capital.