Financial Institutions Regaining Confidence but Have a Long Way to Go, Finds Survey
Banks and insurers are increasingly optimistic and have come far in strengthening risk management. Yet, regulatory compliance may distract attention from emerging risks while the prevalence of a silo-based approach at several organisations hampers risk management at an enterprise-wide level. So finds a survey of 346 senior risk management executives in the financial services industry conducted in February 2010 by the Economist Intelligence Unit (EIU) for SAS.
With 75% of respondents confident about revenue growth and 68% positive on the prospects for profitability, confidence levels have doubled since the survey for last year’s EIU report. But complacency is still a risk. Respondents cite uncertainty over future regulation as the main barrier to effective risk management. For example, banks face tighter capital and liquidity buffers under proposals dubbed the ‘Basel III rules’. The demands of regulatory compliance could eclipse a risk manager’s focus on day-to-day risk management.
Although 60% of respondents in the EIU survey have a clear risk strategy, many see gaps in risk expertise, which claimed three of the top four focus areas for addressing shortcomings. This is especially true for board members who need sufficient information on risk to challenge and question executive management in setting overall risk appetite. Also, report survey respondents, stress testing is the area where there is the greatest need for expertise after compliance and governance.
Silo-based approaches to risk management still plague financial institutions. Fewer than half of respondents believe they understand how risks interact across business lines. Poor department communication hampers effective risk management. Many institutions need to strengthen risk management programs to meet more diverse and frequent reporting requirements from the board: only 47% say they can provide timely and relevant risk reports to their boards.
Enterprise risk management remains a work in progress in the banking and insurance industries. A common denominator in enterprise risk management surveys over the years is the dissatisfaction with data quality and availability, a view that’s echoed in this year’s survey too. Only 39% of respondents believe they are effectively collecting, storing and aggregating data. Four out of five companies surveyed are increasing investment in data quality and integrity. Over-reliance on risk models and problems with data that populate those models are judged as key failures in financial risk management.
Speaking to gtnews, Leigh Bates, head of financial services practice, SAS, said: “Risk management is rapidly rising to the top of the agenda for the vast majority of financial institutions and this can only be a good thing. However, the report shows that there is a lack of clarity as to what a comprehensive risk strategy looks like and how best to go about implementing change.
“Organisations must focus on a number of issues, however two aspects are fundamental to success. Firstly, developing a greater awareness of risk across the company from the board level down and ensuring that risk is incorporated into each line of business is essential. Secondly, it is clear that progress in risk management is dependent on a solid foundation of accurate and accessible data. If data quality is not fit for purpose then an institution will not be able to accurately access their exposure to risk. By building a solid platform of high quality data, and ensuring awareness and buy-in of risk strategy across the entire company, organisations will be in a good position to not only comply with risk regulation but also ensure that any changes benefit business strategy as well.”