Risk Aggregation/Dashboard – the various global events and increasing uncertainty are driving demands for bank boards and senior management to desire an aggregated view on their exposures and risks. The need for timely, relevant information becomes critical. This is driving the risk organization and beyond to look at aggregating and building an integrated risk dashboard to satisfy the increasing demands.
Analytics to drive business decisions – balancing growth and risks is a major theme. Regulatory changes and global economic slowdown are putting pressure on banks’ profitability. Return on equity (ROE) is under pressure, risks are increasing and the foreign banks’ increasing focus on Asia (to counter the slowdown in US and Europe) are leading to a shrinking margin. Regional agenda and focus are helping some of the leading banks counter the challenges but this has the potential of being a double-edged sword. As a result, banks would need to improve their risk and predictive analytics capabilities to target the right customers to manage the possible downside if the economy goes belly-up. For some banks, concerns of the global situation is also driving them to take lesser risks, leading to lower growth rates and also very low non-performing loans (NPLs). Banks should invest and leverage the improved analytics capability to drive higher growth while managing its credit risks.
What are the key challenges facing risk organizations in the next two years?
Christopher Loh: Reducing costs and aligning with overall business strategy: According to Accenture’s survey findings, over the next two years, the main challenges for the risk organization will be reducing costs and aligning with the overall business strategy.
- 47% of respondents named “reducing costs” as a top-five challenge, up from 38% two years ago
- 43% named “aligning risk with the overall business strategy” as a significant challenge, up from 37% in 2009
These two challenges are closely related. That is, given the significant investments required to improve risk management capabilities, aligning those capabilities with business needs is vital. Investments must be made based on measurable business cases because companies have to ensure they are getting an adequate return on the investment. In general, companies are moving beyond a reactive, compliance mindset to a proactive risk management capability that produces business results.
Increase in types and magnitude of risks: Regulatory risk, for example, is a common concern. According to Accenture’s study, 89% of respondents indicated that their company’s regulatory risk will increase in the next two years. Increases in regulatory risk will be more significant in financial services. Another area causing considerable concern is financial fraud and crime: 93% of survey respondents indicate that financial crime and fraud are more challenging to address than two years ago.
How can enterprises become Risk Masters?
Christopher Loh: Based on Accenture’s study, the following capabilities rose to the top when it comes to mastering a new generation of risk masters:
1. Create shareholder value from risk management.
Risk Masters are especially adept at creating processes and mechanisms that link risk to business performance. Risk Masters are especially attuned to their risk management function as a driver of specific benefits. For example, 74% of Risk Masters see the risk organization as critical to reducing operational, credit and market losses compared with only 34% of non-Risk Masters.