Banks Make Headway on Risk Management, but Long Road Ahead
Byline: Donna Borak
WASHINGTON a Banks hurt by the fallout from the financial crisis have made strides in addressing weaknesses in their risk management practices, but more work still needs to be done, according to a recent survey of global firms by Ernst & Young.
Over the last several years, institutions have taken steps to reassess their capital structure across businesses, utilized stress testing, and put into place new models to spot potential risks and impacts on the entire organization. Boards have strengthened their influence on risk management practices at the firms and the role of the chief risk officer has continued to expand, playing a more active role in decision making.
But the results of the survey, which involved 75 banks spanning 38 countries, including U.S. institutions like Bank of America (BAC), Wells Fargo (WFC), and Citigroup (NYSE:C), suggest more headway is needed.
"Despite impressive progress, there is still much to be done to change and fully embed new methodologies and processes," according to the report. "Risk appetite, which post-crisis emerged as a critical foundation of the risk management process, remains a key challenge for many firms."
Members of the International Institute for Finance were surveyed through either an online quantitative questionnaire as well as interviews with CROs and other senior risk executives from the largest global firms.
According to the survey, firms that were greatly impacted by the 2008 financial crisis reported placing greater emphasis on risk culture at their firms. Of those surveyed, more than half of the firms said there was a "significant increase" of attention to the issue over the past year.
"Those of us who were the most seriously threatened by the 2008 meltdown have, of course, been highly motivated to rethink and improve our risk governance philosophy, processes and methodologies," said one CRO, whose firm was hit hard. "As a consequence, we might be further along the curve with improvements than banks that were not impacted."
Rick Waugh, the vice chairman of IIF and president of Scotiabank, said it's clear from the survey that "strong risk management is not a choice, but a requirement."
"I do not know anyone in the industry who underestimates the challenges or who is complacent about these crucial matters," he said in a statement. "Many firms have learned lessons from the financial crisis and have introduced and will continue to introduce significant improvements. We believe that a considerable amount of progress has been achieved, but more [is] to come."
Still, such institutional changes, especially a change in culture at a firm, is often a difficult, long-term process, as one executive suggested. "I don't think any type of cultural journey in a company is every finished."
Most firms a 57% a said they were making progress toward a strong risk culture, but the distance each institution must travel still varied. For example, only 21% of firms that were severely impacted by the crisis believed they were close to achieving a strong risk culture.
Executives in the survey agreed on a number methods that could be used to improve progress on the risk culture at firms, including a commitment for a cultural change at the top of the organization; well-defined risk ownership roles and responsibilities; constant reinforcement of risk values and expectations; and reinforcing accountability.
"You have to make certain that there is 'consequence management' and that everyone knows he or she will be held accountable in their compensation and ongoing employment. If people breach the rules, they pay a heavy price," one CRO said.
Adding to that, firms were also asked about changes they've made to their risk appetite a the amount and type of risk that a company is able and willing to accept to meet its business goals a over the past year. …