The Bankwatch

Tracking the consumer evolution of financial services

Many banks still failing on implementing risk management | Deloitte survey & report

Deloitte have released a report based on a survey of banks and their approach to risk management, including the degree to which they have embedded risk into compensation decisions.  The survey includes financial institutions from around the world, with 27% being banks over $100 Bn.

Slightly more than 50% have not integrated risk across the enterprise and into compensation.  This is somewhat surprising considering the public attention paid to the matter, and the lessons learned over the last two years about the disassociation of compensation from negative results

Risk management in the spotlight | Deloitte

Recent developments in the financial markets have tested the capabilities of risk management across the financial services industry. Against this backdrop, Deloitte conducted its sixth biannual survey of risk management practices across the industry, receiving responses from 111 financial institutions around the world, with aggregate assets of more than $19 trillion.

Banks and other financial institutions continue to have significant opportunities to strengthen their risk management processes and tools. The survey’s findings include:

  1. Risk management is not fully integrated throughout many institutions. Forty-nine percent of the institutions surveyed had completely or substantially incorporated responsibilities for risk management into performance goals and compensation decisions for senior management.
  2. Overall responsibility for oversight and governance of risks rested with the board of directors at 77 percent of the institutions participating and 63 percent of these had a formal, approved statement of risk appetite.
  3. Seventy-three percent of the institutions surveyed had a Chief Risk Officer (CRO) or equivalent position. As an indicator of the role’s importance, the CRO reported to the board of directors and/or the CEO at roughly three-quarters of these institutions.
  4. Only 36 percent of the institutions had an enterprise risk management (ERM) program, although another 23 percent were in the process of creating one.
  5. Many institutions may have significant work to do to upgrade their IT risk management infrastructure.  Roughly half of the executives were extremely or very satisfied with the capabilities of their risk systems to provide the information needed to manage market and credit risk.

Read the full report to understand why the creation of a risk-aware culture, supported by specific methodologies, tools, and governance structures, is necessary for financial institutions to meet the competitive challenges ahead.

Some notable comments from the report:

  • Roughly 80 percent of the institutions employed stress
    tests …  Among institutions that conducted stress tests of their structured product exposures, only 17 percent conducted them daily, while 68 percent conducted these tests quarterly or less often.
  • Other operational risk methodology areas, such as key
    risk indicators, external loss event data, and scenario
    analysis, were said to be well-developed by 20 percent
    or less of the institutions surveyed.
  • Only roughly 40% of executives considered their operational risk assessments and their internal loss event data to be well-developed

This is a 40 page report, with load of advice, criteria, and approaches towards organisation and accountability relative to risk.  Worth the read, if only to scare you into action, which it appears many FI’s need.  Who out there believes this is the last financial crisis we will see?

Roughly 80 percent of the institutions employed stress
tests for their banking and trading books, although
a smaller amount, 58 percent, reported performing
stress tests of their structured product (or securitization
and related transaction) exposures. Among institutions
that conducted stress tests of their structured product
exposures, only 17 percent conducted them daily, while
68 percent conducted these tests quarterly or less often.
Given the pace at which markets move, institutions
may face regulatory or other pressure to perform stress
testing more frequently.

Written by Colin Henderson

June 8, 2009 at 15:37

Posted in Uncategorized

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