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 organisational 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 on behalf of SAS.
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 organisations' risk exposures.
Two-thirds of respondents say external risks pose a greater challenge to their institutions than internal ones, yet only 52% 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, organisations 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.
"To take its necessary place at the executive and board level, risk management must evolve from a technical support function to a strategic process," said David Rogers, SAS global product marketing manager for risk. "This requires an assimilated and comprehensive risk culture, top-down, supported by a truly integrated risk framework that provides both a holistic and specialised view of risk for each business level."