New risks are emerging in the banking and insurance industries as they regain their appetite for growth, according to research by Economist Intelligence Unit.
The report, ‘Too Good to Fail? New Challenges for Risk Management in Financial Services’, sponsored by SAS, examines the state of risk management in the sector as it starts to look beyond the financial crisis. In a global survey of more than 300 senior risk managers conducted for this study, nearly 40% of participants report an increase in the appetite for risk at their firms over the past 12 months. At the same time, it is clear from the survey that progress on revamping and strengthening risk management has slowed.
“A lot has been done to fix the flaws in risk management that were exposed by the financial crisis and the subsequent recession,” said Abhik Sen, editor of the report. “But as financial services firms shift their focus back to growth, they need to be vigilant about the emerging – or, in some cases, re-emerging – risks highlighted in the research.”
Key conclusions of the report include the following:
- Financial institutions’ appetite for risk is on the rise again. After three years of retrenchment, the competition for returns and profitability is intensifying. Approximately 40% of the respondents to the survey say that the appetite for risk at their firms has increased in the past 12 months. Institutions in Asia-Pacific are more likely than those in other regions to take on greater risk.
- Managing complexity is now one of the biggest challenges in financial services. Turbulence has been the dominant theme in the global economy in 2011, and it has been compounded by geo-political shocks. When it comes to threat perception, two-thirds of respondents think external risks pose a greater challenge than internal ones. More than three in five respondents also say that complexity is increasing the risk confronting their organisations. But only 52% report that their employer’s risk management processes are well placed to deal with complex challenges such as volatility.
- The risk function is finding it hard to increase its authority. While 50% of respondents say that the risk function at their firm has gained in authority over the past 12 months, this still leaves a sizeable proportion of risk managers who think their authority has stayed the same or, in some cases, has actually declined. A surprisingly high proportion of respondents – nearly one-quarter – report that the views of the risk function are more often than not overridden or ignored in their organisations.
- There is much room for improvement in the relationship between the risk function and other parts of the business. The role of the risk function has been elevated somewhat in the past couple of years, but risk managers at many organisations still find it hard to build strong and open relationships with colleagues from other parts of the business. Respondents cite poor communication between departments as one of the main barriers to effective risk management; most in need of improvement is the relationship between the risk function and business units.