Drastic risk management reform is inevitable, with better governance and transparency at the top of the agenda.
A survey of 334 financial services executives by the Economist Intelligence Unit on behalf of business analytics software and services company, SAS, has revealed that only a 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 study, released at the Premier Business Leadership Series held in London this week, confirmed that risk management reform within institutions will be far-reaching and comprehensive. More than half of respondents said they have conducted, or plan to conduct, a thorough overhaul of theirrisk 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 GFC 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 behaviors 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 echoed the 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. 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, they agreed that transparency needs to be heavily emphasised 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.
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 previous SAS surveys, data governance continued to be a fundamental issue for risk management initiatives. Only 40 per cent said the importance of risk management is widely understood throughout their company, suggesting that more needs to be done to embed a strong culture risk culture 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," said SAS Global Risk Practice head Allan Russell. "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."