Risk governance — the new agenda for change - Ernst & Young - Global

Risk governance — the new agenda for change

The Institute of International Finance (IIF) published the final report of the Committee on Market Best Practices in July 2008, which set out principles of conduct and best practice recommendations for banks in the light of the financial crisis. This was part of the industry’s response to the causes of the crisis and the recognized need to strengthen governance and risk management going forward.

In March 2009, as part of the review of implementation of the recommendations in the Market Best Practices report, the IIF asked us to conduct a survey of banking executives to gauge the gaps against the recommendations, and identify what they are doing to bridge them.

The resonating message was that the industry had indeed moved quickly to carry out assessments against the recommendations, particularly in countries most affected by the crisis. In fact, most banks in these countries had identified a number of gaps and then instituted programs to address them.

Another core message was their plans to implement these programs for several years or more. Whereas some governance issues could be achieved quickly by changing roles and responsibilities and reporting lines, other changes involved major IT re-development, the creation of new risk assessment measures and, in some banks, cultural change which would take longer.

Insightful survey highlights:

• Key areas on the agenda for change are governance and risk appetite, the role of risk, stress testing and risk transparency. Liquidity risk is also high on the agenda. However, in some countries banks were looking for greater certainty regarding the regulatory landscape before embarking on widespread systems change.
  
• Most banks reported they have carried out a gap analysis against the IIF recommendations, the G20 report and the Senior Supervisors’ recommendations. For a number of banks, the gap analysis would become an ongoing regular assessment.
  
• Most banks said there was significant board and senior management involvement in sponsoring the review and following up on areas for improvement. In some countries, gaps were presented to supervisors.
  
• The answers regarding the degree of change needed in response to the crisis and different industry and official sector recommendations varied widely depending on several factors:
  
  -- Banks severely affected by the crisis and which had experienced the largest losses were planning the most radical changes (one referred to a risk revolution).
  
  -- Other banks in those G10 markets, which had been significantly impacted, were also planning substantial changes.
  
  --  In the markets far less affected by the crisis, banks were learning from problems elsewhere and continued to review controls and make some changes.
  
  --  Some non-G10 banks were still in the throws of implementing Basel II and in particular, the bank-wide risk assessment and capital planning required under Pillar II.
  
• One striking finding is that banking systems, which had been affected by a significant crisis in the previous 15 or so years, seemed to be less drawn into structured products and were far less impacted by this crisis. A number of banks said the earlier crisis resulted in substantive reviews of risk governance and risk appetite, which left them less exposed to some of the higher risk products in this crisis. Some also mentioned that regulatory restrictions, introduced after the past problems, had left them less exposed to structured products.
  
• The time scales for dealing with gaps vary — most banks report that they have acted immediately on some aspects, while other remedial action could take 12 to 24 months or even longer to complete. The greatest impediments to swift action are data and systems and in some cases, cultural change. All banks currently face major pressures on particular types of resource. The current remediation activity has been given the highest priority, but banks are relying on few skilled resources.
  
• Overall this is a journey which will take time to complete.

For further insights into the changes being made and impediments being faced by the banking industry today, download your copy of “Risk governance: agenda for change (pdf, 388.4kb).”