Risk management under pressure
Has the financial services industry reached a comfort zone, placing it in jeopardy of another crisis? Are today’s risk management practices and reporting in tune with existing risk culture and organizational expectations?
Despite lessons learned, reform remains threatened by an imbalance of risk management demands and actual programs and practices in place, according to a recent global risk management survey.
In February and March 2011, the Economist Intelligence Unit (EIU) surveyed 315 executives globally for SAS, the leader in business analytics software and services. Respondents were primarily focused on risk management in banks, capital markets firms and insurers of all sizes from less than $100 million to more than $1 trillion in assets (USD).
While financial institutions initiated some risk management measures to address deficiencies exposed by the financial crisis, risk cultures are ill-prepared for current demands and have been overtaken by competing priorities that encourage growth and profitability without embedded risk strategies.
Because of the cautious overall recovery and recent strong performances in the financial sector, firms have seen increased risk appetites with pressure to expand and boost profits. Respondents are struggling to manage risk, with more than three out of five citing growing complexity in their organizations’ risk exposures.
Two-thirds of respondents say external risks pose a greater challenge to their institutions than internal ones, yet only 52 percent say that their risk management processes are well placed to deal with this volatility and complexity.
The momentum of revamping and strengthening risk management may have peaked since the percentage of respondents is the same compared to last year when questioned about confidence in having a clearly defined risk management strategy. Year on year, the proportion of respondents who are increasing investment in the risk function has fallen slightly across IT, data, training and recruitment.
Silos continue to hamper risk management progress. Although the risk function has been elevated, organizations still lack strong and open relationships between the risk function and lines of business, which need the most improvement. Respondents cite poor communication between departments as a major barrier to effective risk management – whereas last year’s report named future regulation the top concern.
According to the survey, management boards have increased both their risk expertise and demand for risk reporting. More than two in five respondents indicate a rise in the board’s risk expertise and over half report boosted demands for risk reporting, with the retail banking seeing the most. Yet only a minority of institutions appears to be taking steps to upgrade risk reporting, including timeliness, consistency and extent of reporting on emerging risks.
The complete report is available here (registration required).