In the financial services industry, few conversations ever occur without the subject of risk being introduced: how to anticipate, manage, and profit from it. But understanding the risks associated with running lines of business in banking is no simple task. It's harder still at the executive level, where CEOs face a new era of opportunity as financial reform paves the way for convergence among financial services providers, significantly altering the requirements to gauge and maximize one's exposure to risk.
Much of the editorial in this month's issue fleshes out the risks- both real and perceived-faced by bank executives as they position their financial institutions for the 21st century. While many bank CEOs are bullish on the opportunities to be gained through financial reform, they realize there are risks associated with moving into new markets such as insurance. In the small business market, for example, banks are anxious to offer a growing number of small businesses in the United States complete financial services packages that include insurance products (see story on p. 4A). The risk is twofold: Although banks' insurance powers have grown in recent years, the regulatory situation remains somewhat sticky as regulators struggle for overall clarity on the issue, and, secondly, the complexity of the insurance business and its varied products means that banks will have to either acquire or develop new expertise if they are to profit in this market. The potential rewards are great, but the risks of entering the business are nonetheless very real.
On the global front, a report from the Office of the Comptroller of the Currency finds that the perceived performance risk of banks with increased powers is unfounded based on its analysis of financial services companies in other countries that are allowed to engage in banking, insurance and securities activities (see story on p. 12A). The rub: Regulation has no impact on bank performance, which is a blow to the arguments of both advocates and opponents of bank deregulation.
By no means, however, is this a green light to disregard risk management requirements that must extend to businesses across a financial enterprise. A report from Meridien Research, published for the first time in Management Strategies this month (see excerpts on p. 10A), analyzes the solutions from enterprise risk technology vendors, details their competencies and shortcomings, and outlines the challenges before financial services executives in developing enterprise risk technology solutions that will enable them to derive maximum profitability from risks taken. The report is a must-read for all CEOs, chief risk officers, and heads of business units who are interested in better allocating capital based on return on risk-the real impetus for any enterprisewide risk management solution.
Undoubtedly, the ultimate risk to a financial institution is in waiting to strategically move on emerging opportunities. Nothing ventured, nothing gained-a losing proposition in the swiftly changing financial services business.