"Five years ago, if the risk group recommended against a strategy or product, it might just be one part of a debate," says Wells Fargo (WFC -0.4%) chief risk officer Michael Loughlin. Now, "when we say no, it's usually no."
The naysayers are gaining power and multiplying across the banking industry as lenders bow to pressure from regulators to simplify and make safer their operations in the hope of preventing the next financial collapse. For its part, Wells has 2.3K employees in its core risk-management department, up from 1.7K two years ago, and the unit's annual budget has doubled to $500M over that period. Earlier this year, Goldman Sachs (GS -0.2%) made its chief risk officer part of the trader/rainmaker-dominated company management committee for the first time ever.
The changes are expensive and come at a time of sluggish loan growth and trading revenue, but the banks have no choice as regulators wield the power given them by Dodd-Frank.
KeyCorp (KEY +0.1%), for instance, used to pay loan officers for meeting profit goals. Now those bonuses can be lost if their work falls short of new risk-management standards. It's no doubt one factor behind sharply lower loan commitments for construction and real-estate development.