Remaking financial services

Risk management five years after the crisis

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Our fourth annual survey on banking risk management, conducted with the Institute of International Finance, sees a renewed focus on risk culture – and the challenges chief risk officers are facing to get buy-in for such an approach with their organizations.

Risk culture at center stage

Since our first survey in 2009, banks have made significant progress toward changing their risk governance frameworks in the wake of the financial crisis. Board risk committees are nearly universal, and members have received appropriate training in risk management. The role of the chief risk officer has broadened, while its seniority and status have been enhanced.

But the industry continues to wrestle with the process of embedding risk culture beyond the boardroom and into business units while ensuring adequate risk transparency. As a result, financial institutions must ensure that the risk pendulum doesn’t swing too far the other way as the markets improve.

Other key findings from the survey include:

  • Fifty-nine percent of respondents cited the balance between a sales-driven front-office culture and a risk-focused culture as their top organizational challenge; 38% cited a lack of systems and data.
  • More than half of senior risk executives believe their organizations need to do more to instill a strong risk culture, underscoring the need for a sustained effort over a long period of time.
  • The stature and role of chief risk officers have increased markedly since the crisis; 81% report either to the chief executive officer or jointly to the CEO and risk committee.
  • Risk appetite continues to be an essential part of risk governance, but the industry continues to be challenged to embed risk appetite into business decisions.

Risk areas where board is placing the most focus

Each respondent could select three areas of focus


Emphasis on operational risk

The financial services industry recognized during the financial crisis that boards needed to change focus from share price and profitability to the risks entailed in their strategies. Also, chief risk officers needed to be empowered to create cultural change within their organizations.

With these shifts well underway, senior risk executives are focused on moving reputation and operational risk higher up the agenda. However, banks are still struggling to ensure that specific business decisions are consistent with risk appetite and are putting new programs in place to achieve this.

Risk culture within insurance firms

Insurance firms face many of the same challenges as the banking industry: evolving regulatory demands, economic volatility and liquidity pressures. Executives cited risk culture as the compass that keeps their firms on course.

Echoing the bankers surveyed, insurers say having adequate systems and data in place and embedding risk appetite through the decision-making process remain major challenges.


Five themes from the survey

1

Banks are reviewing their cultures across legal entities and business units following several high-profile conduct scandals.

2

There is a much greater focus in 2013 on reputational and operational risk, including the issue of risk appetite.

3

Banks are still working to fully institute their post-crisis risk management policies, with most still finding it difficult to embed risk appetite.

4

Risk transparency is driving further enhancements of stress testing and investment in IT and data.

5

Business models are being rethought in light of regulatory changes, with banks exiting from activities, businesses, markets and geographies.



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Risk areas where board is placing the most focus

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Each respondent could select three areas of focus