The focus is on governance and risk appetite
Banking systems 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 led to substantive reviews of risk governance and risk appetite which left them less exposed to some of the higher risk products in this crisis.
Most banks were also learning from the crisis by focusing on the experience of banks that had been more severely affected this time around. Many banks were tightening controls around the markets where other banks were experiencing major losses.
For many, enhancement of stress testing is seen as central to achieving improved risk governance. Likewise, improvements in risk monitoring are seen as key. Some banks cited the need to improve risk-return management as capital resources become tighter.
A number of banks had reviewed their governance structures, but felt that earlier changes had dealt with most of the recommendations. For banks from the more severely affected markets, changes were generally much more substantial, including significant re-working of risk governance.
Banks found there were gaps in their formalized risk control frameworks. A number of banks cited the fact that the risk function had not been involved in all key decisions. The role had been limited with regard to major strategic decisions and even the development of new products.
Moves have been made to enhance the stature of the CRO, in some cases changing reporting lines so that the CRO reports directly to the CEO and in others by appointing a more senior individual to the role.
Many banks are enhancing risk reporting to the board or board-level committees. Many banks recognize that establishing a clear risk appetite is an important way to improve governance from the top.
Internationally active banks also expect to continue working to embed their risk appetite across business units. A common weakness highlighted is that the risk appetite developed and articulated at group level is seldom distilled into a version applicable for specific business lines.
Other banks are trying to make the risk appetite a more effective tool by including more quantitative measures.
Liquidity risk is also high on the agenda of a number of banks. However, in some countries banks were looking for greater certainty regarding the regulatory landscape before embarking on widespread systems change.
Four key themes
1. The focus is on governance and risk appetite
2. Gap analysis was driven by a top-down approach with significant board and senior management involvement
3. Banks lack agreement on degree of change needed in response to the credit crisis
4. The time scales for dealing with gaps vary and there is significant competition for resources
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