The rising cost of risk: what’s on the horizon?

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As the markets stabilize, executives are bracing for steep cost increases as they boost the time and systems dedicated to dealing with the aftermath of the crisis and the new regulatory frontier.

Multiple layers of complex regulations have increased documentation and reporting requirements. To support these more frequent and complex inquiries, companies are deploying additional teams and increasing investments in information management systems and technology aimed at streamlining data gathering and management across the organization.

The cost of working out troubled portfolios continues to rise at some banks as they deploy work-out teams to clean up distressed assets and debts on the balance sheet. Efforts to hire competitors’ talent has intensified, especially when trying to recruit people who specialize in workouts, compliance, modeling and risk forecasting — significantly driving up the people cost for the foreseeable future.

Banks are anticipating heavy investment in risk management
Estimating the cost of risk is complex
Seventy percent of respondents indicated they were able to estimate total annual expenditures for risk-and-control management across their organizations. This is a significant improvement over the results of the EY survey two years ago in which slightly fewer than half (47%) of those responding claimed they were accurately able to gauge total costs over a 12-month period.

However, respondents agreed that while they could estimate the cost of the central risk organization, it is challenging to truly understand the total enterprise-wide cost of risk management. When “risk is everybody’s business,” it is virtually impossible to estimate accurately the amount of time people at the business-unit level spend on managing risk.

Some banks are embarking on studies to assess risk productivity to gain a more sophisticated view of investments in risk across the enterprise and to benchmark these costs against other comparative banks.


Read the full 2010 annual global bank risk survey report for complete findings.