"The past two years have demonstrated the need for enhanced risk management capabilities at financial institutions, and the challenging times that undoubtedly lie ahead make it an even greater priority," said Edward Hida, the editor of the report and a partner with Deloitte & Touche LLP's Banking & Securities team. He is also the global leader of Deloitte Touche Tohmatsu's Risk and Capital Management practice.
"It has also helped to reiterate a basic risk management principle: risk and return are generally correlated and should be evaluated together. One of the biggest areas in need of review is how to infuse risk management into performance objectives and business decisions."
The sixth edition of the report - titled "Risk Management in the Spotlight" - surveyed chief risk officers (or equivalent senior risk officers) from 111 financial institutions, with combined total assets of more than $19 trillion. Also included in the survey were insurers and asset managers.
Among the survey's other major findings:
- Only 36 percent of the institutions surveyed had an enterprise risk management (ERM) program, although another 23 percent were in the process of creating one. ERM programs provide an integrated, comprehensive assessment of all the risks that an institution is exposed to, and an objective and consistent approach to managing them. Even among institutions with $100 billion or more in assets, a little more than half (58 percent) had an ERM program already in place.
- Regulators have been encouraging financial institutions to independently validate their risk-related models to ensure they can reliably assess the likelihood and magnitude of potential risks. According to the survey, action to date in response has been mixed. While 53 percent of the participating institutions indicated having an independent model validation function, over two-thirds of the remaining respondents reported having no plans to create such a function.
- Senior executives may require more comprehensive metrics and tools to adequately assess all the risks inherent in the range of complex products. Roughly 80 percent of the institutions employed stress tests for their banking and trading books, although 58 percent reported performing stress tests of their structured product exposures. Among institutions that conducted stress tests of their structured product exposures, only 17 percent conducted them daily, while two-thirds conducted these tests quarterly or less often.
- Institutions may also have significant work to do to upgrade their IT risk management infrastructure. Roughly half of the executives were extremely or very satisfied with the capabilities of their risk systems to provide the information needed to manage market and credit risk. In other areas, such as liquidity risk and operational risk, only 40 percent or fewer provided ratings this high.
"With the continued volatility and turmoil in the financial markets, many financial institutions are continuing to invest in more robust and integrated risk management systems that can help consistently deliver a comprehensive picture of risk across multiple lines of business, portfolios, products and geographies," said Jim Reichbach, Deloitte's Financial Services industry leader.
