Financial institutions need to do a better job convincing analysts that they have adequate control over their capital market risks, according to a survey released by KPMG Peat Marwick.
Only 36% of the analysts responding to the survey said the financial services firms they cover adequately understand all the risks of their capital markets units.
About 48% of the analysts said the companies they follow do not understand the risks of the business. Around 50% said the firms had in place acceptable measurement, monitoring, and control processes.
In releasing the results, Peat Marwick suggested that institutions review and improve their risk management programs where necessary - and make a special effort to communicate their policies to the investment community.
"Financial institutions don't seem to be doing a very good job of communicating their risk management policies to the analyst community, when in fact, they may have robust policies and procedures in place," said Michael Malloy, a spokesman for the consulting firm.
Michaels Opinion Research, which conducted the survey in April and May for Peat Marwick, asked 207 analysts for their views of risk management practices of banks, insurance companies, and investment banks. The 66 responses show that trading risks, as well as credit and operational risks are becoming more important to analysts, Mr. Malloy said.
What's more, he said, analysts are starting to look beyond traditional lines of business and beginning to peer into how these institutions are managing their risks.
"They are not only looking to make sure the numbers are true and trending with the peer group, but they are also looking at whether this institution is protecting itself and its shareholders," he said.
"They don't seem convinced," he declared.
Mr. Malloy said there are two possible causes for the analysts' misgivings.
First, it may be that the analysts have concluded through research that the risk management systems are inadequate. Another cause may be the inability or unwillingness of management to divulge such information.
Indeed, poor communication by the firms is evident in the fact that nearly 60% of analysts said they believed the institutions they cover react to risk management situations instead of planning ahead to prevent problems.
Peat Marwick said institutions ought to disclose more about their risk management strategies and procedures in annual reports and other public information. Since 87% of the analysts said they rely on these reports and management interviews for their information, this sort of change is likely to improve many analysts' perceptions.
The analysts themselves say management could demonstrate that they understand the risks of their business by letting their board review the company's risk management policies. Of the survey respondents, 65% supported the establishment of a director for risk management.
Jarius DeWalt, an analyst at M.R. Beal & Co. in New York, said the situation is improving. And with regulators allowing banks to use internal models to calculate risk-adjusted capital, he thinks the flow of information will continue to rise.
"We're now at least better able to get a handle on the portfolio items of these institutions," he said. "It's not where we would like it to be, but it's improving."
"There is still a real need for more understanding of what is going on at the senior level," said Mr. DeWalt.
Mr. Malloy said that by giving analysts more comfort that management knows their risk profile and is actively working toward managing that position, an institution can expect more support from the investment community,
"These are things an institution can do to demonstrate to financial analysts that it has a good handle on things," he said. "If the analysts don't come away feeling that you have a good risk management program, it will be reflected in their evaluation of the company."