Four Observations on How Financial Institutions are "Getting to Strong"
Center for Regulatory Strategies blog
Deloitte1 recently hosted its seventh annual Financial Services Regulatory & Risk Update that drew current and former regulators, industry leaders, and senior executives from major financial service organizations. Sheila Bair, the widely respected former chairman of the Federal Deposit Insurance Corporation, keynoted the event and provided her thoughts and perspectives on how financial services companies can better navigate through this re-regulated world. More to come on her later.
First, after the plenary, we hosted separate breakout discussion sessions for our attendees. The insurance session focused on issues such as captives and interaction with the Federal Insurance Office, while attendees in the securities session learned about the potential business impact of new regulations on over-the-counter business models and market dynamics. While these sessions were very well-received, I want to share some key insights from the banking session that featured a highly esteemed panel of bank executives discussing "getting to strong."
As you know, regulators are pushing banks, systemically important financial institutions (SIFIs), and other organizations to raise their risk management programs to a "strong" rating. Right now, it’s not entirely clear what that means or exactly what is needed to get there. However, our panelists offered four valuable considerations for companies looking to strengthen their risk-management programs.
- Give risk management a seat at the table. Many companies no longer view risk management as a back-office function, but deem it critical to strategic planning – and I couldn’t agree more. For instance, many companies are empowering their Chief Compliance Officers by giving them more resources, a direct line to the board of directors or its risk committee, and a seat at the table to help determine risk strategy.
- Look at the numbers. Many companies are also investing in systems to improve their data analytics, which will permit them to aggregate, measure, and monitor business risks – an important step in "getting to strong." This remains a big challenge for many financial institutions in achieving a strong rating. However, this work can help companies present a stronger case to regulators, and may yield important operational insights that may help drive profitability and value.
- Lead from the top. The panel couldn’t stress this enough, and neither can I. Many boards of directors and senior management teams are taking a more active role in developing an effective governance program. This strong "tone at the top" shapes a company’s risk culture and creates accountability across the organization, which is a big key to effectiveness.
- Talent matters. Many companies are starting to fully understand the importance of hiring strategic, big-picture thinkers and incorporating them into their risk-management divisions. These people understand the details and nuances of risk management, but can also rise above the weeds and see the entire business landscape. However, many companies are learning that such talent isn’t easy to come by and they are taking more effort and time to find individuals capable of such special insight.
If you want to learn more about "getting to strong," I urge you to read our recently released document, Strength training for banks: To lay the groundwork for "getting to strong," consider starting with these elements, which provides a detailed look at the topic.
As a final note, I’d like to touch on the significance of Chairman Bair’s presence at this event. As a former, long-time federal regulator myself, I know all too well that the relationship between industries and supervisory agencies isn’t always without tension. And while I’m now in a position to help companies better navigate the ever-changing regulatory environment, I’m also seeing a real effort among regulators to actively partner with industry. Yes, they must remain true to their oversight role; however, many current and former regulators (like Chairman Bair) recognize that they need to work with industry leaders to deliver the necessary and balanced reforms to achieve a stronger and more resilient financial system. And that’s a good thing for everyone.
Director, Governance, Regulatory & Risk Strategies
Deloitte & Touche LLP
1As used in this document, "Deloitte" means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.