Trading by "lone wolves" should be discouraged, a new senior risk adviser should be hired from outside the bank while there should be changes in the relationship between AIB and Allfirst, according to the wide-ranging recommendations in the Ludwig report.
It also urges that AIB reconsider the scope and location of all proprietary trading activity, taking into account that it is a risky activity that makes money for traders but for few institutions over time."The amount that an institution needs to spend for qualified people and systems to document, settle, control and account for active proprietary trading activities in a controlled manner is large," the report says.
"AIB needs to review the revenue potential of proprietary trading within the group and in particular at its affiliates in light of these costs."
It says that no AIB business unit should engage in such trading unless there are several senior managers in the unit who understand all of the intricacies involved.
The report also recommends that AIB conduct "a careful and thorough review of risk management architecture". The new senior risk adviser should undertake this review, overseen by AIB's audit committee which should meet at least quarterly to assess the bank's major risk exposures.
"The board and senior management should look on current circumstances as an opportunity to ensure that the group has state-of the-art risk management systems,' the repot says. It advises a review by expert outside advisors on a periodic basis, such as every five to seven years, to ensure the group is keeping pace with best practice in this area.
In terms of the parent bank's relationship with Allfirst, the report says the lines of reporting should be "crystal clear". From a risk management perspective, it does not believe it matters much whether these lines go directly to the Allfirst chief executive and then to Dublin or directly to Dublin provided there is "unambiguous accountability".
It also calls for greater representation on Allfirst's board by non-management directors of AIB with at least one such member sitting on the Allfirst audit committee.
Mr Ludwig also calls for personnel reviews in light of the management and control failures that have been identified. It advises that appropriate remedial action be taken with regard to any Allfirst treasury personnel who were negligent in their duties in relation to the fraud.
Recommendations to improve the control environment include limiting trading activities only to those markets where AIB has a real competitive advantage, regularly discussing trading rationale and strategy with traders and severely limiting position size.
The report also provides an interesting insight into life as a high-flying foreign exchange trader when it recommends that trading personnel should not be permitted to accept extravagant entertainment from brokers. But it offers a glimpse of the very different working life enjoyed by Allfirst back office staffers when it says that the "aggressive" behaviour shown by Mr Rusnak and his boss, Mr Ray, toward operations personnel from time to time should not be tolerated.
