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Rebuilding Trust: Next Steps for Risk

Management in Financial Services


A summary of a report produced by the Economist Intelligence Unit
and sponsored by SAS

Fi n d in g s a t a Glanc e
Overview The 2009 report, After the Storm:
A New Era for Risk Management in
• Confidence levels are high, but there is The Economist Intelligence Unit con- Financial Services, found that the major-
a risk of complacency. ducted a global survey on behalf of SAS ity of financial institutions have been con-
to examine how the world’s financial insti- ducting wholesale reforms to the way
• The focus on regulatory compliance
tutions are reinforcing their risk manage- that they manage risk. If anything, the
may distract attention from
ment capabilities in response to the pace of change has accelerated since
emerging risks.
global financial crisis. The online survey, then, with institutions reappraising their
• A clearly defined risk strategy is in place conducted in February 2010, attracted corporate governance structures, risk
at most institutions, but significant 346 respondents – all executives with risk functions, data, IT systems and software,
areas of weakness remain. management responsibilities at banks and business processes and procedures.
and insurance companies around the
• Financial institutions are filling gaps in
world. A series of in-depth interviews with Many banks and insurers have come a
risk expertise with investment in training
industry and risk experts followed the long way in their projects to strengthen
and recruitment.
survey to form the basis of the EIU report. risk capabilities. Discussions about risk
• The silo-based approach to risk This document provides a summary of have become a key part of the board-
management continues to pose the report findings. room agenda, chief risk officers have a
problems. prominent seat at the top table, and there
The financial crisis had many causes, but is renewed zeal for instilling a greater
• Financial institutions continue to
failures in risk management have been awareness of risk principles in the front
struggle with data quality and
clearly identified as a contributory factor. office – the so-called “first line of defense.”
availability.
Although there were technical shortcom-
ings, especially related to risk models and But despite this progress, weaknesses
metrics, a more widespread problem was remain. The enthusiasm for large-scale
a failure of governance, as risk managers’ risk projects has created human capital
legitimate warnings went either unheeded shortages as institutions scramble for the
or unnoticed. In the pre-crash credit bub- appropriate expertise. Data and IT sys-
ble euphoria, a front office-driven culture tems remain significant impediments to
too often rode roughshod over risk man- an overall understanding of risk expo-
agers’ concerns, and many CEOs were sures, while regulatory uncertainty makes
more focused on outperforming revenue it difficult to plan for the long term.
The full report is available at and profit targets while paying little heed
www.sas.com/ermresearch. to growing risk concentrations. The final report – Rebuilding Trust: Next
Steps for Risk Management in Financial
The crisis changed all that. Across the Services – includes the complete survey
industry, risk management has moved to findings along with insights and analysis
the center of strategic decision making, from industry experts and commentators.
and many institutions are revamping their
entire approach to understanding and
mitigating the risks that they face.
Report Highlights
Risk management processes and systems 48%

Confidence levels are high, but Business risk expertise 46%

there is a risk of complacency Board-level expertise 38%

Risk function expertise 32%

Compared with 12 months ago, finan- Data quality 30%

cial institutions are feeling much more Defining line responsibility for risk management 25%

confident about the future. Around Risk reporting 21%

three-quarters of respondents believe Data availability 16%

that prospects for revenue growth over Real-time (or intra-day) risk 9%

the next year are good, whereas 68 per- Others, please specify 2%

cent are positive about the prospects for 0 10 20 30 40 50 60 70 80 90 100

profitability. These levels of confidence,


which are around double the levels of a From the survey: In which of the following areas do you think the most signifi-
cant focus should be to address current shortcomings in risk management?
similar survey conducted last year,
reflect a widely held view that the finan-
cial system has stabilized. There is a risk Six out of 10 respondents now say that Even now, less than half of respondents
of complacency, however. As govern- they have a clearly defined risk strategy in to our survey are confident that they
ments withdraw stimulus packages and place that is updated regularly. However, understand the interaction of risks
liquidity support for the financial sector, this still leaves a worrying 40 percent who across business lines, and poor com-
revenues and profitability could yet fall. do not conduct regular updates or do munication between departments is
not have a clear risk strategy in place. seen as a key barrier to effective risk
management.
Focusing on compliance could distract
attention from emerging risks Investment in training and recruitment
Around the world, regulators have is filling gaps in risk expertise Institutions continue to struggle with
stepped up their scrutiny of financial data quality and availability
Respondents recognize that gaps in risk
institutions. While few would argue expertise have been an important part An over-reliance on risk models, and
against a tougher regulatory regime for of the problem in risk management. problems with the data used to popu-
financial institutions, survey respondents Asked about key focus areas to address late those models, have been widely
highlight uncertainty over future regula- shortcomings, respondents list issues seen as key failures in financial risk
tion as the main barrier to effective risk related to expertise as three of the top management. Today, financial services
management. There is a danger that the four priorities. More than half say that firms recognize that data quality and
focus on compliance could be “crowd- they are increasing their investment in availability need to improve. Collecting,
ing out” day-to-day risk management at training, both of risk professionals and storing and aggregating data is an area
a time when formerly uncommon risks, across the broader business, and a sim- of weakness for many institutions,
such as sovereign debt crises, are ilar proportion say that they are spend- with only 39 percent of respondents
becoming more commonplace. ing more on recruitment. overall believing that they are effective
at these activities.

Most institutions have a risk strategy The silo-based approach to risk


in place, but weaknesses remain continues to pose problems
Investment in risk management is During the crisis, the separation of risk
increasing almost across the board, with into separate departments led many
risk processes, data, IT and training financial institutions to underestimate
being key areas of focus for most. risk concentrations and correlations.

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