Banks and insurers are more optimistic and have made strides strengthening risk management, according to a survey of 346 senior risk management executives in the financial services industry conducted in February by the Economist Intelligence Unit.
Still, regulatory compliance may distract attention from emerging risks while the prevalence of a silo-based approach at several organizations hampers risk management enterprise-wide, the survey found.
With 75% of respondents confident about revenue growth and 68% positive on the prospects for profitability, confidence levels have doubled since the survey for last year’s EIU report. EIU is an arm of SAS, a business analytics software and services company.
Complacency is still a risk. Respondents cite uncertainty over future regulations as the main barrier to effective risk management. For example, banks face tighter capital and liquidity buffers under proposals dubbed the “Basel 3 rules.” The demands of regulatory compliance could eclipse a risk manager’s focus on day-to-day risk management.
Although 60% of respondents have a clear risk strategy, many see gaps in risk expertise, which claimed three of the top four focus areas for addressing shortcomings. This is especially true for board members who need sufficient information on risk to challenge and question executive management in setting overall risk appetite. Also, report survey respondents, stress testing is the area where there is the greatest need for expertise after compliance and governance.
Silo-based approaches to risk management still plague financial institutions. Fewer than half of respondents believe they understand how risks interact across business lines. Poor department communication hampers effective risk management. Many institutions need to strengthen risk management programs to meet more diverse and frequent reporting requirements from the board: only 47% say they can provide timely and relevant risk reports to their boards.
Enterprise risk management remains a work in progress in the banking and insurance industries. A common denominator in enterprise risk management surveys over the years is the dissatisfaction with data quality and availability, a view that’s echoed in this year’s survey too. Only 39% of respondents believe they are effectively collecting, storing and aggregating data. Four out of five companies surveyed are increasing investment in data quality and integrity. Over-reliance on risk models and problems with data that populate those models are judged as key failures in financial risk management.
“Financial institutions need to respond to evolving opportunities and challenges in risk management and effect change that impacts both staff and systems across group and business lines,” says David Rogers, SAS Global Product Marketing Manager for Risk. “Progress requires an integrated risk data infrastructure with timely access, the ability to measure exposure and risk across all risk types and books of business, and incentive distribution for consistent optimization of risk-adjusted returns throughout the organization.”
Additional focused sector reports from this survey, covering insurance, retail banking and investment banking/commercial banking, are scheduled for release in June.