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Credit crisis could have been averted

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The current global credit crisis could have been averted if the financial services institutions at the heart of it had implemented proper risk management processes.

With the current credit crisis triggering more than $400-billion in asset write-downs among the financial services industry, enterprise risk management (ERM) programs and components are in high-demand now more than ever to help institutions aggregate risk and treat it holistically.
According to a global survey of 316 financial services executives, more than 70% of respondents believed that the losses stemming from the credit crisis were largely due to failures to address risk management issues.
The results of a global survey conducted in July 2008 by the Economist Intelligence Unit on behalf of SAS gained insight into enterprise risk management strategies.
Executives now appear to be paying attention, with 59% of survey respondents saying the credit crisis has prompted them to scrutinise their risk management practices in greater detail.
In anticipation of closer scrutiny from regulators, many institutions are revisiting their risk management practices. In addition, recent reports by the Financial Stability Forum (FSF) and the Institute for International Finance (IIF) are now calling for closer scrutiny of the risk management process.
TowerGroup analyst Rodney Nelsestuen agrees. "Enterprise risk management has taken on new importance as stockholders, boards of directors and regulators demand better, more timely analysis of risk and a deeper understanding of how the institution is impacted by the dynamic risk environment of a global financial community," he says.
Survey respondents identified several challenges such as data and company culture, which have affected the implementation of comprehensive risk approaches. For many executives at financial services firms, access to relevant, timely and consistent data is a major obstacle. In addition, almost half of the respondents believed fostering a culture of risk management was the most widely encountered challenge.
Firms participating in the survey are recognising that successful integrated risk programs go beyond quantitative benefits. In areas such as credit and market risk, an integrated approach can efficiently allocate capital and provide better loss containment; it also serves as a form of protection against a damaged reputation.
"This survey is evidence that the risk management needs of financial institutions are evolving to go beyond regulatory risk and must break down traditional risk silos to drive toward a firm-wide risk view," says André Zitzke, solutions specialist at SAS.