The areas of risk management getting the most attention at global banks
In order to make strategic decisions with conﬁdence, banks must have a ﬁrm grasp of the risks inherent in their various activities. In the post-crisis environment, the assessment of strategy, risk and capital will become more sophisticated and more nuanced.
Banks, regulators and investors alike are seeking to understand the output of risk models more fully. Stress testing and the periodic reassessment of how the businesses can be expected to perform across all material risks are also likely to become increasingly prominent in the understanding and management of risk and in the management of capital and liquidity.
As the business of risk-taking and the requirements of operating across jurisdictions and legal entities have become more complex, so has the business of assessing risk and making business decisions. The CFO and CRO and their organizations continue to work more closely together to assess risk and capital and to support strategic decisions.
Over the medium term, banks will likely focus on the following six areas of risk management:
- Reassessment of business strategy. Many banks will consider reallocation of capital to businesses that have the potential to offer higher risk-adjusted returns under new requirements. Some businesses may well become less attractive or even unviable given increased capital and liquidity requirements. At the same time, robust capital allocation and performance measurement methodologies and infrastructure will be necessary.
- Analysis and implementation of capital optimization opportunities. As the reformed ﬁnancial framework increases capital requirements and tightens capital supply for most ﬁrms, there will be a renewed impetus to look for efficiency opportunities as they relate to required capital, both through changing risk-taking activities and through enhancements to methodologies and infrastructure for calculating regulatory capital.
- Monitoring and revision of capital adequacy goals. Banks will continue their work to link ﬁnancial and capital adequacy goals to risk appetite through the capital planning process and stress testing. With the introduction of explicit regulatory liquidity standards, balance sheet management techniques may need to be adapted to include a greater intersection of capital and liquidity constraints in business and strategic planning.
- Reduction of the complexity of business operations and rationalization of legal-entity structure. The need to reduce systemic risks of large, multinational institutions and for formal recovery and resolution plans, combined with greater demands by local regulators to meet local regulatory capital and liquidity standards, means institutions increasingly must assess their business structures and identify steps to reduce unnecessary business complexity and minimize trapped capital and liquidity.
- Improvements in reporting. Banks will continue to focus on improving the information that is available to the board, senior management and lines-of-business managers, getting timely, accurate, easily digestible, information into the hands of the right individuals. Risk and ﬁnance reporting is likely to become more integrated. In addition to periodic standardized management reporting, institutions will seek to provide greater on-demand access to information through better use of business intelligence technology.
- Improvements in data quality and systems. The demand for more information, of higher quality, at a greater frequency, that is readily transparent and reconcil-able across the organization continues to grow. The increased demands resulting from business needs, regulatory requirements and accounting changes is pushing institutions to continue to expand the number of data elements and ensure they meet the highest data-quality standards. They also must integrate business, risk and ﬁnance information and make it readily available across the entire enterprise. To provide this comprehensive view readily and transparently, banks will likely need to invest signiﬁcantly more in both their risk architectures and their approach to data management.
Download the CFO report “Capital management in banking: senior executives on capital, risk, and strategy” for complete findings.