Toronto, February 28, 2005 – As financial services institutions around the world face escalating exposure to risk, a new survey finds that Canada and the United States lag behind the rest of the world in their ability and preparedness to deal with increasing risk. Factors such as mergers, off-shoring, outsourcing, inadequate risk governance and over-ambitious lending all contribute to escalating risk. Deloitte's 2004 Global Risk Management Survey is based on interviews with senior executives from the world’s top 162 global financial institutions. The survey is intended as a global benchmark for the state of risk management in the financial sector.

“Financial institutions increasingly recognize that strong risk management governance should be part of the overall business strategy,” says Leon Bloom, managing partner, Global Financial Services Industry, Deloitte. “The factors that increase risk in today’s environment are numerous — increasing globalization, accelerated merger and restructuring activity, security management concerns, complex lending and investment issues, shifting industry regulations and increasing public scrutiny. Now more than ever, Canadian corporations need to fully assess their risk management requirements to enable them to implement the best solutions to benefit their long-term business goals. Failure to fully recognize and manage risk will have serious consequences for Canadian corporations in regulatory terms as well as business performance. The inability to deal with risk will ultimately affect an institution’s bottom-line.” 

According to the survey, financial services companies worldwide are clearly recognizing the need to effectively manage risk, as evidenced by the significant increase in companies that have established the position of Chief Risk Officer (CRO) — up to 81 per cent in 2004 from 65 per cent in 2002. Despite the global trend, Canada, along with North America, lags behind the rest of the world with only 75 per cent of companies stating they have a CRO.

The survey findings indicate that risk management is increasingly being recognized by senior management as a key component of a company’s overall business strategy, with three quarters of CROs in financial services firms reporting to the chief executive or board of directors.

Main findings from Deloitte's 2004 Globe Risk Management Survey

• Continued influence of regulators on risk management trends
  The survey indicates that a tougher regulatory environment (post-Enron) has contributed significantly to a greater emphasis on risk management. In 2004, the Bank for International Settlements established a revised new capital adequacy framework for banks, known as Basel II. The survey indicates just over one-third of firms feel they meet the standard framework requirements. Meanwhile, the Sarbanes-Oxley Act in the U.S. and similar legislation, such as Bill 198 in Canada, have clearly elevated the importance of corporate governance, board oversight, internal controls, and financial disclosures — with the threat of criminal prosecution for non-compliance.
• Enterprise risk management (ERM) continues to be an elusive goal
  Despite the increasing emphasis on containing risk, the survey shows that ERM continues to be an elusive goal for many institutions globally (including those in Canada) with less than one-quarter of survey participants stating that they are able to integrate risk across any of the major dimensions of risk type, business unit, or geography. The focus of companies with respect to ERM is on measuring economic risks including credit, market, operational, and liquidity. And while 38 per cent of respondents say they have integrated the organizational structure required to deal with these risks, only 15-16 per cent reported progress in integrating methodology, data, and systems.
• Credit risk management
  Beyond regulatory developments, organizations are investing in credit risk infrastructure improvements because of growth, merger integration and competitive pressures. In the area of credit risk management, respondents reported significant progress since the 2002 survey. The influence of Basel II requirements, commercial credit market difficulties, and increased lending volume spurred by low interest rates in the consumer sector have caused management to focus more attention on strengthening credit risk capabilities. As a result, 61 per cent of respondents are planning a high or moderate level of investment in the next 12-24 months for commercial credit, and 53 per cent for consumer credit.
• Off-shoring, near-shoring and outsourcing becoming global trends bringing new challenges
  These new business strategy trends have introduced novel and challenging risks into firms’ risk profiles. Communication complexities compound this problem where affiliates are operating in countries with different cultures, geographies and time zones. When it comes to off-shoring, near-shoring and outsourcing arrangements across a variety of corporate functions, survey respondents reported that information technology and application management was the only area where a majority (61 per cent) employed an Extended Enterprise Solution (EES). Just less than half of the respondents use EES for call centres or back office processing.
• Operational risk management continues to emerge
  According to the survey, Operational Risk Management (ORM) continues to be considered a challenging and relatively new field compared to more established risk management disciplines, with Canada and North and South America noticeably behind Asia-Pacific and Europe in terms of ORM program progression. However, the survey does show an increase over 2002 in the number of firms that have established ORM programs even though the majority of respondents indicated that at least some improvement in functionality is still required.
• Market risk and asset/liability management
  The survey shows that in terms of market risk, many firms are adding coverage of additional product types such as asset-backed securities. They have also increased their use of advanced modeling techniques such as event risk and they are doing more stress testing, which indicates more attention is being paid to current market risk analysis. In the asset/liability management arena, the survey shows that financial institutions are building upon the core analytics and methods that have been in place.
• Risk systems and technology
  While information technology is considered to be the key enabler of risk management architecture, respondents report a host of continuing challenges in developing adequate risk systems. More than half (52 per cent) cited a lack of integration among systems as a major concern and 42 per cent cited it as a minor concern. Lack of flexibility and scalability as well as performance issues were also noted as key challenges. Improving regulatory-related systems capabilities and implementing operational risk management and advanced credit risk systems were the three highest priority items cited by respondents in the systems development and technology area.

About the 2004 Global Risk Management Survey
Deloitte’s fourth bi-annual survey, which serves as a global benchmark for risk management in financial services firms, contains responses from 162 financial institutions on six continents with assets totaling nearly $19 trillion. The survey sample included responses from 12 financial services sectors in four broad categories: investment banking and related services, commercial banking, integrated financial services, and retail banking. Respondents answered questions which addressed the range of key risk management issues facing financial institutions including: Risk Governance, Economic and Regulatory Capital, Enterprise Risk Management, Credit Risk Management, Market Risk and Asset/Liability Management, Operational Risk Management, Risk Systems and Technology and Extended Enterprise Solutions. Learn more about Deloitte’s Financial Services group.

About Deloitte
Deloitte, one of Canada's leading professional services firms, provides audit, tax, consulting, and financial advisory services through more than 6,100 people in 47 offices. Deloitte operates in Québec as Samson Bélair/Deloitte & Touche s.e.n.c.r.l. The firm is dedicated to helping its clients and its people excel. Deloitte is the Canadian member firm of Deloitte Touche Tohmatsu. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other's acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names "Deloitte," "Deloitte & Touche," "Deloitte Touche Tohmatsu," or other related names. Services are provided by the member firms or their subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein.