KPMG survey looks into banking risk management

As banks examine the factors leading to the current credit crisis, it is becoming clear that risk management typically is not viewed as central to strategic decision-making, according to a survey by KPMG LLP.

More than three-quarters (76 percent) of the almost 500 global banking executives surveyed report that risk management is still stigmatized as a support function at their bank. Only half (48 percent) said that risk management is understood to be the responsibility of everyone in the organization, and another 45 percent of respondents said their board lacks risk expertise. Furthermore, 64 percent of respondents said that their chief risk officer needs to hold greater influence over strategy development, despite 81 percent of respondents reporting that risk management is viewed by their bank as a competitive advantage.

"Risk management programs may have been in place at most banks, but the survey indicates there were shortcomings around the execution of those plans," said Michael Conover, a principal in the financial risk management practice at KPMG LLP. "Financial models don't prevent poor risk decisions, people do. To restore confidence in bank's risk management policies, banks should start by changing the risk culture, which includes giving risk management a seat at the table when critical decisions are being made, educating senior management and boards on risk management best practices, and setting the right 'tone at the top.'"

When asked to rank the leading contributors to the credit crisis, the banking executives named incentives and remuneration (54 percent), followed closely by lack of risk governance (50 percent) and risk culture (48 percent). Interestingly, 73 percent of respondents said the credit crisis has illustrated the need for tougher regulation in the banking industry. However, only 36 percent said that regulators should become more involved with setting compensation in the industry.

85 percent of respondents said that they have already reviewed, or are in the process of reviewing, their risk management procedures, with another seven percent saying that they are planning to undertake a review. But only 42 percent of respondents have made - or plan to make - fundamental changes to their risk processes.

When asked what they expected to be the top focus for their banks over the next year, the executives surveyed cited reporting and measuring of risk (78 percent), risk governance (77 percent) and risk culture (77 percent). The survey also found that 78 percent of respondents want to improve the way risk is measured and reported, to help improve the accuracy of forecasts.

Other key survey findings:

- Only a fifth (19 percent) of respondents feel that a ‘silo’ mentality contributed to the credit crisis, yet a majority acknowledge that communication between different parts of the business needs to improve.
- Only half (53 percent) of respondents claim to currently have executives with deep practical risk management experience in place, although 62 percent of executives said that acquiring or developing risk management skills will be the priority for risk management investment.
- Almost a quarter (23 percent) of executives said they have no risk committee, nor plans to install one.
- Only 40 percent have non-executive directors with risk management experience. Twenty-four percent expect to address this skills gap, leaving 36 percent with no plans in this area.
- Overall, 54 percent of the executives surveyed said that their bank does not expend enough resources on risk management.

The KPMG ‘Risk Management in Banking’ survey, conducted by the Economist Intelligence Unit, was based on telephone interviews conducted in October 2008 with 496 senior managers at organizations involved in corporate, retail, investment and private banking, as well as asset management. Three-quarters (76 percent) of the banks participating in the survey have a chief risk officer (CRO) or equivalent.

www.us.kpmg.com

•Date:8th January 2009• Region: World •Type: Article •Topic: Financial sector
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