Three ways banks are rethinking risk strategies

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Many executives believe that the industry’s heightened focus on risk governance is one of the most positive outcomes of the crisis, forcing senior management to fundamentally rethink their strategic approach to risk. Below are three approaches global banks are taking.

  1. Reassessing and integrating risk appetite: boards and senior management are clearly defining risk tolerance and limits
    The level of acceptable risk must be assessed and determined for each risk type and line of business. Disparate business goals, weak communication and spotty enforcement can cause a disconnection between the risk parameters set at the board and senior management level and the day-to-day management of the business. Cascading the risk parameters down to the business unit and desk level is critical to putting risk appetite into effect throughout the organization.

    How banks can define a risk appetite

  2. Strengthening risk identification processes: banks are looking at risk holistically and assuming a more vigilant stance on risk identification policies and procedures 
    Improvements in this area include: daily real-time monitoring of risks; stricter portfolio risk-grading systems; and tighter screening of on-boarding procedures for new clients. Several institutions have formed new cross-functional risk identification committees composed of managers from finance, risk, technology, compliance, treasury, accounting and the business units. Many companies have upgraded their product approval policies and procedures, increasing the involvement of the risk group in developing, approving and monitoring products throughout their life cycle.

  3. Shifting focus on risk classes: new areas of risk are surfacing on senior management agendas
    As the focus on risk intensifies, companies are enhancing their management of key risks, including:

    • Credit risk: the top of the agenda. Banks are conducting stringent independent credit analysis both for borrowers and for credit providers and guarantors. They are deploying special workout teams that will manage loan portfolios more rigorously to resolve remnant structural credit positions and monitor deterioration in credit quality, charge-offs and related delinquencies. And they are strengthening their credit risk management function and team.
    • Operational risk: assessing the nuts and bolts. Initiatives include: standardizing documentation of processes and controls; improving data gathering, quality and timeliness; developing methodologies and metrics to quantify risks; and conducting scenario analysis by risk type.
    • Liquidity risk: the biggest lesson learned. There was still widespread agreement that the industry underestimated the difficulties of measuring and forecasting liquidity, and all concurred that liquidity must be factored more fully into risk management. New liquidity risk committees meet weekly in some institutions to track and monitor liquidity positions. Basic risk governance policies and procedures have been reviewed and strengthened, common terminology established, data quality and collection upgraded and reports improved. Liquidity stress testing has become an important part of forecasting providing valuable input into the capital and strategic planning process.
    • Market risk: calming down. Market risk has been taken off the front burner on senior management risk agendas. The extreme volatility in the market is calming down and respondents are breathing a collective sigh of relief. But the contagion impact — the extent of the crisis and speed with which it swept through the industry — is very much on everyone’s mind.
    • Reputational risk: an erosion of trust. Not surprisingly, effective management of reputational risk has become increasingly important, and respondents are brutally aware of the erosion of trust and confidence in the industry.

Next: Who’s responsible for risk governance at global banks?

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