The future of the financial industry is inextricably bound together with the future of risk management. The financial crisis exposed the fact that many firms were either unaware of the risks they faced or simply failed to understand them. However, while it is clear that risk management practices need to change and need to be improved; many firms cannot see clearly how this should happen.
In part, this is because of the failure of previous risk management projects to deal adequately with the challenges that the financial sector faced. After each crash, the financial sector has attempted to improve its risk management, often spending large sums of money, only to find itself caught unawares yet again in the next crash.
Many financial institutions have been disillusioned by the failure of major projects to achieve their goals or to reduce risk. As a result, firms are wary of projects that promise to transform risk management and may even become convinced that they can do little to improve risk management over the long term. Instead, regulation has taken center stage and plans are based around introducing tactical, compliance-focused risk management solutions.
While these short-term tactical actions are necessary, they need to be taken in the context of a long-term strategy for solving the problems around risk management. Identifying these problems is easier said than done. Financial institutions face myriad challenges in today’s environment, making it more difficult to understand what solutions and technologies should be employed to solve these problems.
To understand the problems that firms are facing and to track developments in the risk technology market, Misys commissioned Chartis Research to carry out a survey of risk professionals on the subject of their aims for enterprise risk management and the obstacles that they face. The survey and analysis was carried out independently by Chartis Research.
The key findings of the survey show:
• Almost half of firms surveyed did not have a well-formulated enterprise risk management program, one that gives them a clear view of all risks across their organization and allows them to manage
these risks in a flexible, collaborative way
• Regulation, especially Basel 3, is a major driver for change, but firms also believe there is currently too much emphasis on regulatory compliance and not enough on improving risk management.
Regulations are forcing firms to deal with the symptoms of crashes, rather than the root causes, which can only be solved by better risk management
• Firms want to do more to embed risk throughout the firm to enable collaborative risk management – respondents want more accountability in the front office for risk, more use of risk information in the
front office, and increased use of risk-adjusted performance measures.
The results show that firms are moving from centrally controlled, top-down risk management towards collaborative risk management based on encouraging all areas of the bank to take responsibility for risk management. This report examines these results and explores how firms can implement collaborative risk management.