Report: Banks Can't Do Too Many Stress Tests

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Banking companies have done a good job implementing a number of best practices in risk management, such as hiring chief risk officers and increasing board oversight, according to the sixth edition of Deloitte & Touche LLP's Global Risk Management Survey.

However, the banking industry must develop more comprehensive policies to manage their risks, according to the report, which Deloitte released Monday.

Its recommendations include instituting enterprisewide risk management programs, developing independent measures to validate policies and expanding stress testing to other lines of business, such as structured products.

Banking companies should also conduct stress tests more often, the report said, and they should incorporate risk management duties into performance goals for executive compensation.

Only 36% of the firms surveyed had an enterprisewide risk management program or an integrated approach to assessing all the various risks encountered by banking companies, such as operational, credit, market or liquidity risk.

"It's important to have a consistent governance structure — not silos for separate business lines, subsidiaries or geographies — both in terms of methodology, but also in terms of sharing information and rolling that information up to senior management and, ideally, the board," said Edward Hida, the editor of the report, for which 111 companies were surveyed in the fourth quarter. Hida is also a partner with Deloitte's banking and securities team.

In the survey, 23% of the companies said that they were in the process of creating such a comprehensive program.

Bankers also need to do a better job of independently validating all the procedures that measure risk within the institution — a practice that regulators are increasingly urging banks to implement in light of the current crisis, Hida said. Though just over half the companies surveyed (53%) have designated employees to independently validate procedures developed by others, and over two-thirds of the others said they had no plans to designate one.

On the issue of stress testing, about 80% conducted stress tests for banking and trading books, but only 58% did so for their structured product exposures. Hida said bankers should expand their testing to all product lines and conduct their tests more often. Of the companies that tested their structured product portfolios, 17% did so daily, but two-thirds did so quarterly or even less frequently.

Less than half the companies surveyed (49%) incorporated how well executives were handling risk management duties into performance goals for the purpose of determining compensation.

Hida applauded the industry for making strides in implementing corporate governance practices for managing risk. Nearly three-fourths of the firms surveyed (73%) had a chief risk officer or equivalent position, and within that group, roughly three-fourths had the risk chief report directly to the board and/or the chief executive.

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