2. Involve the risk organization in key decision-making processes.
The risk management organization needs to be included in activities such as strategic planning, objective setting and incentives, financing decisions and performance management processes. Accenture believes that, by involving the risk function in key business decisions, companies can link risk and profitability objectives, improve strategic capital decisions and increase shareholder returns.
3. Improve the sophistication of measurement, modeling and analytics to anticipate risks in an increasingly complex environment.
Risk Masters are more likely to measure a fuller spectrum of risk types, and they have a higher commitment to analytics and risk modeling. According to Accenture’s research, 90% of Risk Masters measure strategic risks, compared with just 63% of peers; 95% measure business risks, while only 70% of non-Risk Masters do so. Financial services firms have the highest prevalence of sophisticated measurement programmes. Among non-financial firms, retailers have the highest risk modeling scores. This is likely a function of the intensive data and information typically held in this industry regarding customers and markets— something required to compete effectively within tight margins.
How effective are Enterprise Risk Management (ERM) programmes?
Christopher Loh: The existence of ERM programmes correlates strongly with risk mastery. Accenture’s study revealed that 90% of Risk Masters have an ERM program in place compared with only 64% of non-Risk Masters. However, a lot of ERM programs are still in its infancy – i.e. many of them have delivered frameworks but have not driven greater change and adoption throughout the organization. One of the key challenges remains around building and fostering a strong risk culture across the organization.
How do financial institutions address new regulations around the increased capital requirements, liquidity risk, counterparty credit risk and reporting?
Christopher Loh: There is a general “wait and see” mentality in a number of banks whereas the leading institutions (and risk masters) are working on improving their risk capabilities to create competitive advantage. For example, for liquidity risk, instead of focusing on just reporting the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), banks are reviewing their overall liquidity and funding risk management strategy, governance and infrastructure and identifying opportunities to reduce liquidity and funding costs.
In terms of the increased capital requirements, banks in this region are well placed to comply as Asia were less affected by the crisis. A number of regulators in the region have also provided guidance on their expectations on the increased capital requirements which are well within the current capital ratios banks have. Guidance on liquidity risk has been scarce, while some regulators have been requesting submission of the key ratios from the banks, draft guidelines are not expected until sometime in 2012.