Financial institutions increasing focus and resources on risk management

As regulatory scrutiny ramps up.

According to Deloitte’s eighth biennial survey on risk management practices, titled “Setting a Higher Bar.”, heightened regulatory scrutiny and greater concerns over risk governance have led financial institutions to elevate their focus and attention on risk management.

About two-thirds of financial institutions (65%) reported an increase in spending on risk management and compliance, up from 55% in 2010.

Alongside increased spending, risk management has also significantly risen up the agenda in the boardroom. According to the survey’s results, 94% of company boards now devote much more time to risk management oversight than five years ago, and 80% of chief risk officers report directly to either the board or the chief executive officer.

"The survey findings show that financial institutions are becoming increasingly confident in their risk management abilities, but they also recognize where there are gaps. Where concerns linger particularly is around operational risk, with a number of recent headlines – like management breakdowns and large-scale cyber attacks – underscoring the important impacts this area can have on a firm’s reputation. This is a gap that needs to be addressed," said Deloitte.

Deloitte’s survey assesses the risk management programs, planned improvements, and continuing challenges among global financial institutions. The eighth edition surveyed chief risk officers – or their equivalent – at 86 financial institutions, and represents a range of financial services sectors, including banks, insurers, and asset managers, with aggregate assets of more than US$18 trillion. The survey was conducted from September to December 2012.

Here are the other major findings from the survey:

Business strategy and new banking products: The impact of increased regulation is having a significant effect on business strategy and the bottom line, with 48% of firms confirming that they have had to adjust their banking products and/or business activities, a percentage that doubled from 24% in 2010.

Stress Testing: Stress testing has become a central plank in many institutions’ risk management efforts. Eighty percent of the institutions surveyed stated that stress-testing enables a forward-looking assessment of risk, and 70% said that it informs the setting of their risk tolerances.

Risk Technology Improvements: Technology used to monitor and manage risk is a particular concern and, according to the report, significant improvements in risk technology are needed. Less than 25% of institutions rate their technology systems as extremely or very effective while 40% of institutions are concerned about their capabilities in the management of risk data.

Compensation: Progress in linking risk management with compensation has changed only incrementally. Currently, 55% of institutions incorporate risk management into performance goals and compensation for senior management, which is little changed from 2010. The use of “clawback” provisions in executive compensation, however, has increased (41% vs 26% of institutions in 2010).

Operational Risk: Operational risk, which is a key component of Basel II, has been a continuing challenge for institutions. The lack of ability to measure operational risk and the complexity of many operational processes are key causes of this. Only 45% of institutions rated themselves as extremely or very effective in this area, decreasing slightly from 2010 figures.