Deloitte estimates annual cost of risk governance & controls for top 100 global financial institutions to exceed $100bn by 2012

• Financial institutions are seeking to improve governance and risk management learning the lessons of the recent crisis
• Gap remains between governance frameworks and risk taking behaviours
• Understanding risk appetite is key challenge for organisations
• Links between good behaviours in risk management and incentive programmes are in the public eye

The annual cost of implementing risk governance frameworks at the world’s leading 100 financial institutions is set to exceed $100bn in 2012, according to a forthcoming study by Deloitte, the business advisory firm.

This figure has doubled since 2006, the last full year before the financial crisis, when Deloitte estimated that the annual amount spent on risk and control activities was approximately $50bn. The increased investment has been driven both by regulation and businesses’ responses to the credit crisis and has gone primarily to boosting management information systems and the resources deployed on risk management and oversight.

However, despite the growing financial investment in risk governance Deloitte believes the success of such expenditure hinges on a corresponding behavioural change in risk culture. While 93% of the chief risk officers (CROs) surveyed said their firms had comprehensive enterprise-wide risk statements in place, only 67% suggested these were having a significant impact on risk taking behaviour.

Martyn Jones, chairman of the corporate governance services group at Deloitte, commented:

“The disparity between the risk management and governance measures that need to be put in place and the current reality must be tackled. It is clear that financial institutions are investing more heavily in risk management, but some are struggling with the integration. The fundamental issue is around behavioural changes - without changes in attitudes and behaviour no framework will be truly effective.

“Undoubtedly a key challenge for boards of some financial institutions is to raise the bar in relation to their risk management and governance. It is going to take much effort for organisations to develop and imbed this cultural change. And those with a governing function including non executive directors need to appreciate that their performance and level of challenge will be monitored very closely in this area going forward.”

Kari Hale, banking and securities partner at Deloitte, commented:

“Defining, managing and monitoring “risk appetite” is key and a lynch pin in delivering the outcomes targeted by the Walker Review and the FSA’s recent consultation paper 10/3. But neither businesses nor the regulator have yet developed a clear model of how this is best done.

“It is arguably the most significant unsolved challenge arising for the market. Without clearer definitions of risk appetite and effective means of monitoring against such within financial institutions it will be tremendously difficult for the new risk committees and their supporting CROs to deliver the Walker Review’s aims or to pass the new and more stringent regulatory benchmark for systems and controls. This could place the individuals identified as holding the relevant executive and NED ‘significant influence function’ status in a potentially exposed and awkward position, since the old approach of taking more or less of an intuitive approach to overseeing this in the round is unlikely to suffice in this new regulatory regime.”

Commenting more broadly on financial regulation, Russell Collins, head of the UK financial services group at Deloitte, added:

“It is vital that the regulatory developments in each country are, wherever possible, coordinated with international agencies to ensure that the large complex financial institutions affected are able to concentrate on implementing the risk and control changes which are really necessary to improve their individual governance and to strengthen the system’s financial stability.”
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About the report

The purpose of Deloitte’s upcoming report is to shed some light on the progress of major financial institutions around the world on governance and control systems.

Deloitte surveyed the chief risk officers or equivalent at 28 financial institutions, including investment banks, retail banks and insurers, on issues relating to their risk governance framework. Respondent institutions are based in North America, Europe and Asia Pacific and represent 30% of the total market capitalisation of the top 100 global financial institutions. 

The survey was conducted in October 2009.

About Deloitte
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu ("DTT"), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other's acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT. Deloitte LLP is authorised and regulated by the Financial Services Authority.

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