According to a global survey of 334 financial services executives, only one-third think the principles of risk management in financial services remain sound and are confident that policy-makers can formulate an effective response to the current economic crisis.
The results of the survey in March 2009 by the Economist Intelligence Unit on behalf of SAS Institute.
Risk management reform within institutions will be far-reaching and comprehensive according to the survey. More than half of survey respondents say that they have conducted, or plan to conduct, a thorough overhaul of their risk management, including improvements to data quality and availability, strengthening risk governance, moving towards a firm-wide approach to risk, and deeper integration of risk within lines of business.
Although the crisis has eroded confidence in risk, the survey's findings underscore the need for financial institutions to weave performance management closely with risk governance. All departments, not just lending need a clearer picture of risk adjusted performance and the behaviours that influence it. From marketing to sales, each needs to ensure their strategy positively impacts results and that their actions are not unknowingly contributing to, or hiding risk concentrations.
Tower Group senior research director Virginia Garcia echoes this sentiment. "Although technology is not to blame for the widespread financial crisis, rigid technology and business processes have undoubtedly made it difficult for many FSIs [financial services institutions] to respond rapidly and effectively to the financial crisis. This situation reinforces the business case for a more agile and intelligent enterprise architecture to mitigate risk by helping FSIs adjust to volatile business dynamics."
Even though less than one-third of respondents felt regulators handled the financial crisis properly, respondents agreed that transparency needs to be heavily emphasized within proposed reforms. They pointed to greater disclosure of off-balance-sheet vehicles, stronger regulation of credit rating agencies, and the central clearing for over-the-counter derivatives as initiatives thought to be most beneficial to the financial services industry.
Survey respondents identified poor data quality, lack of expertise and a lack of risk culture among the broader business as barriers to improving risk management in their organisation. As noted in past surveys as well, data governance continues to be a fundamental issue for risk management initiatives. Only 40% of respondents say that the importance of risk management is widely understood throughout their company, suggesting that more needs to be done to embed a strong culture of risk management in financial institutions.
"Now more than ever, this survey confirms the need for the players in financial markets to make transparency a major part of a comprehensive overhaul of risk and performance management to make better business decisions," says Allan Russell, head of SAS Global Risk Practice. "The key will be investment in a risk infrastructure that supports a holistic view of risk within organisations, embedded within day-to-day operations and overall business strategy."