Report Summary
Too good to fail? New challenges for risk management in financial services is an Economist Intelligence Unit report that examines the steps banks and insurers around the world are taking to reinforce their risk management capabilities against the backdrop of an improving economic environment. The report is sponsored by SAS. The Economist Intelligence Unit bears sole responsibility for the content of this report. The findings and views expressed in this report do not necessarily reflect the views of the sponsor.
Much has changed in the banking and insurance industries since the darkest days of the financial crisis. Today, it is almost unthinkable that any CEO would completely ignore warnings from a chief risk officer, as was the case at Lehman Brothers just before it collapsed in 2008. With regulators, management boards and investors scrutinising risk practices more closely than ever, the risk function at most financial services organisations has more teeth now.
Financial services firms everywhere have initiated at least some measures to address the most glaring deficiencies in risk management that were exposed by the crisis. But have they done enough? The organisational and structural changes that have taken place in the aftermath of the crisis send a clear signal about the value that the sector now places on risk management. But they are just one piece of the jigsaw. Inculcating and embedding a stronger enterprise-wide risk culture remains an ongoing challenge. Perhaps the biggest challenge in risk management, as perceived by respondents in this year’s Economist Intelligence Unit survey, is the prospect of institutional complacency. A nascent economic recovery and the relatively strong recent performance of the financial sector are encouraging many firms to become bolder, which is reflected in the key findings of the research.
Key findings include the following:
Financial institutions’ appetite for risk is on the rise again. After three years of retrenchment, the competition for returns and profitability is intensifying. Just under 40% of the respondents to our survey say that the appetite for risk at their firms has increased in the past 12 months. Institutions in the Asia-Pacific region are more likely than those in other regions to take on greater risk.
Managing complexity is now one of the biggest challenges in financial services. Turbulence has been the dominant theme in the global economy in 2011, and it has been compounded by geo-political shocks. When it comes to threat perception, two-thirds of respondents think external risks pose a greater challenge than internal ones. More than three in five respondents also say that complexity is increasing the risk confronting their organisations. But the challenge posed by complexity is not always being met by a greater focus on risk management. For example, only 52% report that their employer’s risk management processes are well placed to deal with volatility. In addition, only 34% of all respondents say
that they now have a better understanding of tail risks—an important capability, given the number and magnitude of unexpected shocks so far this year.
The risk function is finding it hard to increase its authority. While one-half of respondents say that the risk function at their firm has
gained in authority over the past 12 months, this still leaves a sizeable proportion of risk managers who think their authority has stayed the same or, in some cases, has actually declined. A surprisingly high proportion of respondents—nearly one-quarter—report that the views of the risk function are more often than not overridden or ignored in their organisations.
There is much room for improvement in the relationship between the risk function and other parts of the business. The role of the risk function has been elevated somewhat in the past couple of years, but risk managers at many organisations still find it hard to build strong and open relationships with colleagues from other parts of the business. Respondents cite poor communication between departments
as one of the main barriers to effective risk management; most in need of improvement is the relationship between the risk function and business units.
Progress on revamping and strengthening risk management has slowed. Previous surveys in this series have found firms steadily increasing their efforts to strengthen risk management. This year, there are signs that the momentum of those efforts may have peaked. The percentage of respondents who are confident their organisations have a clearly defined risk management strategy is broadly the same as a year ago. Year on year, the proportion of respondents who say their organisations are increasing investment in the risk function has fallen slightly across IT, data, training and recruitment.
Management boards at financial organisations are now paying a lot more attention to risk. More than two in five risk managers who participated in this year’s survey indicate that their management boards have beefed up their risk expertise and over one-half of respondents report that their boards are demanding more rigorous risk reporting. Retail banks are particularly likely to be facing increased risk scrutiny from their boards. For those risk managers who are experiencing greater demands from the board, there is significant change in the level of detail and analysis that they are now expected to provide.
