Global Risk Management Survey- Fifth Edition
Accelerating Risk Management Practices
The Global Risk Management Survey: Fifth Edition is our most recent examination of the state of risk management in the global financial services industry. We solicited the participation of CROs or their equivalent at financial services firms around the world. Respondents included global, regional, local commercial and retail banks as well as diversified financial institutions.
The survey showed an industry that is alert to this growing range of risks, but identified a number of important areas where additional investment and management attention is needed. It also highlighted some of the basic approaches firms are taking, areas where they have improved risk management capabilities, and areas where they are still struggling to get a good handle on risk issues and processes.
The key findings of the survey include the following:
- At 70% of the institutions participating in the survey, oversight responsibility for risk management lies at the very top of the organization, with the board of directors – an increase from the 59% reported in 2004 and 57% in 2002.
- An indication of the accepted role of the CRO in the industry is that 84% of institutions now have a CRO in place, up slightly from 81% in the 2004 survey and 65% in 2002, while another 8% said they plan to establish this position. The CRO typically reports at the highest levels, to the CEO at 42% of the institutions and to the board at 37%.
- Executives were most likely to rate risk management at their institutions as extremely or very effective for traditional risk areas – 80% for market risk, 80% for credit risk and 73% for liquidity risk. In contrast, only 47% considered their institution extremely or very effective in managing risks associated with business continuity/IT security, 43% each for operational and vendor risk and 35% for geopolitical risk.
- Only 35% of executives reported that their institutions have already implemented an ERM program. However, 32% said they are in the process of establishing one and 18% said they are planning to create one.
- Where ERM programs have been created, they have yielded benefits – roughly three-quarters of executives from companies with ERM initiatives said the total value of their programs had exceeded the costs. However, this assessment of value is only qualitative – only 4% of executives said their institutions quantify the benefits of their ERM programs.
- More than 70% of executives reported that their firms had established formal enterprise-wide programs to implement Basel II. At the same time, many institutions still have significant work to do in reaching key Basel II qualification standards, especially in the areas of validation and testing, use test requirements, analytics and calibration and use of the Advanced Measurement Approach (AMA) for modeling operational risk under Pillar I.
- Although more than 60% of executives reported that their institutions used Value at Risk (VaR) extensively for fixed income, foreign exchange and equity, less than one-third said it was used extensively for a range of other instruments including asset-backed securities, structured products, credit derivatives and energy products.
- Only 42% of institutions reported using stress testing extensively as a tool to understand their risk profile, although an additional 34% used it somewhat. Collateral and guarantees continue to be the most extensively used risk mitigation methods to provide support to credit facilities.
- In the area of operational risk, about one-fourth of executives said their operational risk management systems were very capable in terms of reporting and data gathering, and more than two-thirds said they were at least somewhat capable in those areas. Lagging behind were exposure calculations and scenario model building.