Survey reveals that risk management costs will continue to escalate
VANCOUVER, July 13 /CNW/ - According to the latest Ernst & Young survey, 72% of global banking executives cite regulatory uncertainty as the top challenge their organizations face around risk management.
As global regulators and legislators tighten regulatory oversight in response to the financial crisis, banks are bracing for the new rules to affect fundamental aspects of their business. Ernst & Young's 2010 survey on risk governance, Recover, adapt, advance: back to business in an uncertain world, reveals that 80% of banking executives polled plan a significant increase in costs to manage heightened regulatory requirements and strengthen risk governance across their business.
"As financial institutions get back to business, they face a triple threat of new regulatory requirements, rethinking risk strategies and grappling with rising costs," says Tom Wong, the Vancouver-based leader of Ernst & Young's Financial Services practice in Western Canada. "In BC, for example, credit unions need to address the complexities and risks associated with shifting their focus to provide more sophisticated wealth management offerings to their members, in order to better compete with banks and other asset managers."
Global chief financial officers, chief risk officers and compliance officers agree that risk management costs will continue to escalate over the next 18 months and beyond, as they boost the time and systems dedicated to dealing with the new regulatory frontier. Some even predict "exponential" increases as the requirements tighten.
New regulations designed at the G20, International Monetary Fund and European level and nationally set by local regulators are expected to impose further restrictions on capital, liquidity, risk management and compensation practices. However, for countries like Canada, it remains to be seen just how strict they will be and how soon they will take effect.
Executives are already busy responding to pending regulatory requirements, particularly the potential restrictions on capital. They report a variety of initiatives - raising capital levels and ratios, rebalancing portfolios and reassessing market strategies - to prepare for the anticipated changes.
"This may explain why we're seeing local financial institutions exiting more capital-intensive, less profitable lines of their businesses," says Wong. "But, we're also seeing them increase their focus on active risk management - not just because of regulatory requirements, but because they're realizing the value it can bring to reducing unforeseen exposures. Active risk management is good strategy in these times."
Respondents unanimously agree that risk governance must remain a top priority on senior management agendas: 38% of interviewees say their organizations are working diligently to upgrade their risk governance policies and procedures with the goal of instilling a risk awareness culture throughout the organization.
In an effort to build a more comprehensive, consistent and collaborative approach to risk, boards and management teams are starting at the top by defining, articulating and enforcing an organizational risk appetite and working to cascade it throughout the business.
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