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Management: Lack Of Stature and Resources for Risk Management

 





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Results from a KPMG international ‘Risk Management in Banking’ survey showed that as banks examine the factors leading to the current credit crisis, it is becoming clear that risk management typically is not viewed as central to strategic decision-making.


More than three-quarters (76 percent) of the almost 500 global banking executives surveyed, report that risk management is still stigmatised as a support function at their bank. Only half (48 percent) said that risk management is understood to be the responsibility of everyone in the organisation, and another 45 percent of respondents said their board lacks risk expertise. Furthermore, 64 percent of respondents said that their chief risk officer needs to hold greater influence over strategy development, despite 81 percent of respondents reporting that risk management is viewed by their bank as a competitive advantage.

“Risk management programs may have been in place at most banks, but the survey indicates there were shortcomings around the execution of those plans,” said Michael Conover, a partner in the United States Financial Risk Management practice of KPMG. “Financial models don’t prevent poor risk decisions, people do. To restore confidence in banks’ risk management policies, banks should start by changing the risk culture, which includes giving risk management a seat at the table when critical decisions are being made, educating senior management and boards on risk management best practices and setting the right ‘tone at the top.’”

When asked to rank the leading contributors to the credit crisis, the banking executives named incentives and remuneration (54 percent), followed closely by lack of risk governance (50 percent) and risk culture (48 percent). Interestingly, 73 percent of respondents said the credit crisis has illustrated the need for tougher regulation in the banking industry. However, only 36 percent said that regulators should become more involved with setting compensation in the industry.

Trevor Hoole, National Financial Services leader in South Africa notes; “With a crisis of this magnitude, there is never just one cause, and the survey shows many in the banking industry globally believe that a combination of forces – incentives to take risks, and lapses in banks’ overall risk governance and culture – were in play. Locally, tough banking regulations already exist, which has certainly aided in maintaining stability in our banking sector. Internationally however, stronger regulation alone will not be the solution. As a result, banks are already taking steps to make improvements and fill the talent gaps in their risk management programmes, which should go a long way in helping to overcome the challenges. Local banks are viewing risk management in a very similar way.”

Indeed, 85 percent of respondents said that they have already reviewed, or are in the process of reviewing, their risk management procedures, with another 7 percent saying that they are planning to undertake a review. In addition, 62 percent of executives said that acquiring or developing risk management skills will be the priority for risk management investment.

Hoole agrees with Conover’s statement that; “Improved enterprise-wide risk management processes and policies lead to more informed decision-making, since decisions are not made in silos.”

When asked what they expected to be the top focus for their banks over the next year, the executives surveyed cited reporting and measuring of risk (78 percent), risk governance (77 percent) and risk culture (77 percent). The survey also found that 78 percent of respondents want to improve the way risk is measured and reported, to help improve the accuracy of forecasts.

Other key survey findings:

· Surprisingly, only a fifth (19 percent) of respondents feel that a “silo” mentality contributed to the credit crisis, yet a majority acknowledge that communication between different parts of the business needs to improve.

· Only half (53 percent) of respondents claim to currently have executives with deep practical risk management experience in place, although 21 percent are planning additions in this area.

· Almost a quarter (23 percent) of executives said they have no risk committee, nor plans to install one.

· Only 40 percent have non-executive directors with risk management experience. 24 percent expect to address this skills gap, leaving 36 percent with no plans in this area.

· Overall, 54 percent of the executives surveyed said that their bank does not expend enough resources on risk management.

 
 
 
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