A global study of risk management efforts at banks and other financial institutions finds them badly lagging in their reforms. Perhaps most shockingly, despite widespread outcry about poor incentives for managing risk, less than half of the financial insituti9ons survey by Deloitte have incorporated risk-management responsibilities, either in whole or in part, into the performance goals and compensation decisions for senior management.
Other major findings:
- Only 36 per cent of the institutions surveyed had an enterprise risk management (ERM) program, although another 23 per cent were in the process of creating one. ERM programs provide an integrated, comprehensive assessment of all the risks that an institution is exposed to, and an objective and consistent approach to managing them. Even among institutions with $100 billion or more in assets, a little more than half (58 per cent) had an ERM program already in place.
- Regulators have been encouraging financial institutions to independently validate their risk-related models to ensure they can reliably assess the likelihood and magnitude of potential risks. According to the survey, action to date in response has been mixed. While 53 per cent of the participating institutions indicated having an independent model validation function, over two-thirds of the remaining respondents reported having no plans to create such a function.
- Senior executives may require more comprehensive metrics and tools to adequately asses all the risks inherent in the range of complex products. Roughly 80 per cent of the institutions employed stress tests for their banking and trading books, although 58 per cent reported performing stress tests of their structured product exposures. Among institutions that conducted stress tests of their structured product exposures, only 17 per cent conducted them daily, while two-thirds conducted these tests quarterly or less often.
- Institutions may also have significant work to do to upgrade their IT risk management infrastructure. Roughly half of the executives were extremely or very satisfied with the capabilities of their risk systems to provide the information needed to manage market and credit risk. In other areas, such as liquidity risk and operational risk, only 40 per cent or fewer provided ratings this high.
Here’s the entire survey
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