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KPMG INTERNATIONAL
Never again?Risk management in banking beyond the credit crisis
A U D I T T A X A D V I S O R Y
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Contents
Page
4 Executivesummary
6 Rethinkingbanksapproach toriskmanagement
12 Theemerginginuence otheriskunction
20 Riskexpertiseacross theorganization
24 Toolsormeasuring
andmanagingrisk
30 Conclusions:movingorward
31 Participantsandmethodology
32 Contacts
Neveragain?Riskmanagementinbankingbeyondthecreditcrisis
2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGInternational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGInternational have any such authority to obligate or bind any member firm. All rights reserved.
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Foreword
Thecreditcrisishasorcedbanks
totakeacriticallookathowthey
manageriskandhasexposedsome
signifcantweaknessesinrisk
managementacrossthefnancial
servicesindustry.
The collapse o several high prole
banks, the emergency bail out o others,
departures o CEOs and CFOs, thehundreds o billions o dollars o write-
downs, eorts by banks to raise resh
capital were all signs that something
had gone very badly wrong.
On rst examination, the current
predicament appears to stem rom the
pursuit o revenue growth in a world
o easy credit. The reality o course
is more complex and a number o
themes emerge rom the survey
ndings: weaknesses in risk culture
and governance; gaps in risk expertise
at the non executive Board level; lacko infuence o the risk unction; lack
o responsibility and accountability
o those on the ront line; a
compensation culture too oriented
towards year on year prot increases;
business models that were overly
reliant on ample market liquidity.
Above all this has been a crisis o
judgment on the part o many banks,
with an apparently excessive ocus
on short-term gain and a lack o
healthy skepticism.
AllrisksareinterconnectedThe crisis has also driven home
the interdependencies in the global
banking system, both at a micro level
within organizations and at a macro
level across the industry. The world
has witnessed a tragedy played out
in two acts: the rst stage hit those
banks that had either lent to the US
sub prime market or took on derivatives
o these loans; the second stage has
eectively hit almost every nancial
institution, with the inter-bank lending
market drying up as condenceevaporated rom the banking system.
To some extent, banks have become
victims o their evolution. A series o
mergers and acquisitions have helped
to create more complex structures, with
a plethora o products and systems that
have oten not been integrated, making
it considerably harder to understand
the ull extent o the risks that had been
taken on across all business lines.This has not been helped by a wave
o sophisticated products that have
oten proved dicult or both buyers
and sellers to ully understand. Poor
internal circulation o inormation has
oten urther contributed to blurring
banks view o their overall risk
exposure, with certain parts o an
organization requently unaware o
activities and exposures in other areas;
a situation that may have been
exacerbated by the peripheral role
o what in some cases wereineective risk unctions.
Addressingriskgovernance
atalllevels
The shortage o risk expertise at the
Board level also highlighted in the
survey is something that is currently
being debated in the industry. In the
same way that US company Boards
require someone on the audit
committee with an accounting
background, there may one day
also be a similar requirement or risk
proessionals. A number o bank Boardmembers are rom outside the industry
and, as the survey responses show,
have varying degrees o risk
management expertise or
understanding. Many o the better
perorming institutions over the past
18 months have greater depth o risk
experience at Board level.
The skills gap is not conned to
the upper echelons. Many o those
responsible or originating transactions
seem to be out o tune with the
organizational risk appetite, not ullyaccountable and either unwilling or
unable to make measured judgments on
the level o exposure theyre taking on.
Remuneration policy undoubtedly
infuences behavior and despite many
banks operating long-term incentive
and compensation policies closely linked
to share price, many compensation
structures have arguably encouraged
the pursuit o short-term prot overlong-term shareholder value. The media
have been quick to blame incentives or
the crisis, and with a number o national
governments taking part or complete
ownership o banks, it is likely that
there will be increasing involvement
by the regulators in the setting o
reward policies.
Towardsholisticriskmanagement
The crisis has highlighted an urgent
need or improved enterprise wide
risk management procedures where,as Kevin Blakely, President and CEO
o The Risk Management Association
succinctly puts it: The right hand
knows what the let is doing.
By ollowing this path, banks should
bring greater judgment to decision
making, based on a clear understanding
o the products and the risks involved.
In the new risk culture, everyone
should consider him or hersel a risk
manager with a shared understanding
o the organizational risk appetite,
underpinned by a clear governance
structure or managing risk,incorporating three lines o deense:
the rst line being the business unit;
the second the independent risk
management unction itsel; the
third internal audit.
Such an approach oers appropriate
checks and balances and should be
supported by a compensation policy
that is rmly tied to shareholder
value over the ull period o any
transactions involved.
Neveragain?Riskmanagementinbankingbeyondthecreditcrisis
2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGInternational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGInternational have any such authority to obligate or bind any member firm. All rights reserved.
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Qualitative judgment should also take
precedence over the recent reliance on
purely quantitative data, which should
support rather than dominate decision-
making. Models should be orward
looking and not rooted purely in historic
data. Even the most complex product
propositions ought to be presented in
a way that makes them intelligible tothe Board, external stakeholders and
indeed customers.
As the risk unction takes center
stage and gets more involved in major
strategic and product decisions, it also
needs to retain its independence in
order to oer an objective judgment
on any risks that the organization may
take on.
Aboutthissurvey
In this October 2008 survey, carried
out by the Economist Intelligence Unitand involving over 500 senior managers
involved in risk management rom
leading banks around the world,
respondents were asked to identiy the
weaknesses in risk management that
contributed to the crisis and the actions
being taken by the industry to prevent
such a catastrophe reoccurring.
Someothepressingissues
coveredinclude:
The eectiveness o risk-governance
and culture
The changing infuence o the
risk unction
The level o risk expertise rm wide
The impact o incentives and
compensation policies The way risk is measured
and reported
The results which are augmented
by comment should provide a useul
contribution to the debate on how banks
can create a well-governed risk
management inrastructure with the
fexibility to stand up to uture volatility.
We would like to thank all those that
were generous enough to take part
in this survey at a time when their
resources are stretched by the ongoingtroubles in the marketplace.
JrgHashagen
Partner and Global Head o Financial
Risk Management, KPMG Germany
NigelHarman
Partner and Head o Financial Risk
Management, KPMG UK
MichaelConover
Partner, New York Leader o
Financial Risk Management
Neveragain?Riskmanagementinbankingbeyondthecreditcrisis
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGrnational have any such authority to obligate or bind any member firm. All rights reserved.
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Executivesummary
Many o the banks participating in KPMGs global survey
acknowledge that a lack o discipline in risk management was
a contributory actor in the credit crisis. Although most are taking
steps to address any weaknesses in their management o risk,
the results suggest a potential lack o commitment to the kind
o elemental change that may be necessary to avoid a repeat
o recent events.
Despiteimprovingitsprole,the
riskunctionisstillstrugglingto
gaininfuence
Seven out o ten respondents eel that
risk departments are having a greater
inluence within banks, particularly
at a strategic level. However their
involvement in more day-to-day
business decisions may be restricted
by poor communication with the lines
o business. More worryingly, a vast
majority (76 percent) o those involved
in managing risk still eel that, despite
raising its proile, risk is stigmatized
as a support unction.
Banksarenotaddressingthelack
oriskexpertiseatseniorlevels
Under hal (45 percent) o the banks
in the survey acknowledge that their
Boards are short o risk knowledge
and experience a lower igure than
may have been expected. It is o
some concern that many are not
even planning to address this issue
particularly at the non-executive
level where the need or expertise
is most acute. With a quarter o
respondents seeing no need or a Risk
Committee, many organizations could
be lacking a rigorous, independent
challenge to the judgments beingmade in the businesses.
Tochangeriskculture,banks
shouldleadromthetop
The survey reveals the vast majority
o those responsible or managing risk
(77 percent) are dedicated to instilling
a more robust risk culture in their
organizations and eel that greater
tone rom the top, along with a more
authoritative risk unction, are two o
the keys to such a transormation.
Some respondents expressed concern
that regulators rather than non-
executive directors are driving
change. This urther supports the
perception that in certain institutions
risk may still be seen as a peripheralcompliance issue, rather than an
essential part o strategy.
Executivesummary |
76%oseniorriskmanagersstilleelrisk
isstigmatizedasasupportunction
45%othebanksinthesurveyacknowledge
thattheirBoardsareshortorisk
knowledgeandexperience
2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGInternational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGInternational have any such authority to obligate or bind any member firm. All rights reserved.
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| Executivesummary
5
Ninety two percent o those surveyed have carried out or
are about to carry out a review o the way they manage risk.
Tellingly, only 42 percent have made or plan to make undamental
changes to their risk management processes, suggesting a
degree o complacency. The main areas being addressed are
risk governance, risk culture and reporting and measurement
o risk; the three key building blocks o a risk inrastructure.
Poorcommunicationwasnot
toblameorthecreditcrisis
Only a ith o respondents eel
that a silo mentality contributed
to the current turmoil in the industry,
yet a majority acknowledge that
communication between dierent
parts o the business needs to
improve. Banks are particularly
concerned about improving links
with the lines o business those
on the ront line who have to consider
the risks they take on, whether its
making trading decisions or
developing new products.
Bankswanttoprovidebetter
inormationordecisionmaking
Almost eight out o ten respondents
are seeking to improve the way that
risk is measured and reported, a
clear acknowledgement that previous
models did not suiciently measure
potential risk exposure. Their
emphasis will be on stress and
scenario testing, along with Basel II
credit models, but it remains to be
seen whether such measures will
be either lexible or sophisticated
enough to ully capture the range
o possible outcomes.
Riskmanagersappearreluctant
totackleincentiveand
compensationissues
Despite acknowledging that the
rewards culture has had a big impact
upon the current crisis, the majority
o those responding are cautious
about increasing the involvement o
either regulators or the risk unction
itsel in setting policy. This suggests
that risk managers are uncertain
o their role in this critical area.
36%orespondentseelthatregulators
shouldplayaroleinremuneration
92%othosesurveyedhavecarriedout
orareabouttocarryoutareview
otheirriskmanagement
Theriskcommitteeshouldoversee
theactiveacceptanceoriskwithin
theorganization.
Kevin Blakely, President and CEO,
The Risk Management Association
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGrnational have any such authority to obligate or bind any member firm. All rights reserved.
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Rethinkingbanksapproach
toriskmanagement
Rethinkingbanksapproachtoriskmanagement |
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Intherunuptothecreditcrisis,
banksriskgovernance,riskculture
andincentiveandremuneration
policieswerethethreeareaswhere
themanagementoriskletthem
downthemost,accordingto
KPMGs2008globalsurvey.
The majority o Chie Risk Ocers
(CROs), risk proessionals and othersenior managers taking part in the
survey acknowledge that the industry as
a whole had an inadequate ramework
or controlling risk. They also admit that
the prevailing organizational culture did
not stop excessive risk taking, uelled by
a system o prot-based rewards that
ailed to protect the needs o depositors.
However, somewhat surprisingly, a
majority (almost six out o ten) o banks
still consider their own risk governance
and culture to be eective, suggesting
that some have yet to acknowledgetheir own role in the troubles that have
embraced the sector.
Chart 1 Elements of risk management most at fault in contributing to the credit crisis
Incentives and remuneration
Respondents were allowed multiple responses. Source: 2009, KPMG International
Risk governance
Risk culture
Setting and monitoring risk appetite
Level of risk expertise at Board level
Reporting and measuring of risk
Risk systems and data quality
Lack of skills and experience
Communication acrossorganizational silos
Other
52%
50%
48%
42%
40%
39%
32%
29%
21%
9%
| Rethinkingbanksapproachtoriskmanagement
52%orespondentssayincentivesandremunerationpoliciescontributedtothecreditcrisis
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGrnational have any such authority to obligate or bind any member firm. All rights reserved.
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Rethinkingbanksapproach
toriskmanagement,continued
Arebankstakingsucientaction
toimproveriskmanagement?
The survey indicates that many banks
are taking positive steps to overcome
these weaknesses; around hal o those
participating have already reviewed the
way they manage risk, with most o
the remaining respondents either
involved in or about to start a review.However, only our out o ten have
made or intend to make undamental
changes, which is perhaps lower than
may have been expected and could
indicate an unwillingness to take specic
and decisive action in tackling the
weaknesses that led to the credit crisis.
Regardless o the degree o change
anticipated, a majority o respondent
banks are seeking to tighten up their
overall risk management. Governance
and culture are both high on the agenda
as they attempt to put in place moreeective policies, procedures and
controls and make sta more aware
o enterprise-wide risks when acing
key business decisions. There is also
considerable ocus on improving the
way that risk is reported and measured
as well as the systems and data that
underpin such analysis. This is
recognition that managers across the
business units did not have suciently
robust data when making some o the
decisions that led to the present troubles.
Chart 2 Have you reviewed risk management in your organization?
Yes, and made fundamental changes
Source: 2009, KPMG International
Yes, and made minor changes
Currently reviewing and expect to make fundamental changes
Currently reviewing and expect to make minor changes
Expect to review in future
No intention to review
23%
29%
19%
14%
7%
8%
Chart 3 How will you change your attention to the following over the next year?
Risk governance
1 Significant increase 2 3 4 5 Significant decrease
Risk culture
Incentives and remuneration
Communication acrossorganizational silos
Reporting and measuring of risk
Risk systems and data quality
Skills and experience
Level of risk expertise at Board level
Setting and monitoring risk appetite
34% 43% 21% 1%
30% 47% 20% 1%
13% 33% 44% 2%
24% 46% 26% 1%
19% 43% 33% 1%
27% 51% 18% 1%
20% 45% 32%
21% 44% 30 1%18% 30% 44% 1%
1%
2%
8%
3%
4%
3%
3%
4%
7%
Source: 2009, KPMG International
Rethinkingbanksapproachtoriskmanagement |
2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGInternational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGInternational have any such authority to obligate or bind any member firm. All rights reserved.
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Riskmanagementhasnotbeenclosely
alignedwithcompensationpolicy
Despite being cited in the survey
as the single biggest contributor to the
current crisis, less than hal (46 percent)
o the respondents are planning a
signicant increase in attention to
this issue. There appears to be some
uncertainty over the role o the riskmanagement unction in developing
and managing compensation policy.
This is not to say that respondents
do not support reorm to compensation:
almost six out o ten avor greater use
o long-term incentives; and a similar
proportion want to expand the practice
o risk-adjusted measures. Other
proposals, such as longer deerral o
bonuses and an increase in proportion
o remuneration paid or divisional
perormance attract less interest.
In a urther twist, the riskproessionals involved in this survey
are also cautious about any external
pressures on rewards and incentives,
with just over a third (36 percent)
agreeing that regulators should become
more involved in the setting o
remuneration in the banking industry.
| Rethinkingbanksapproachtoriskmanagement
Chart 4 Which of the following remuneration initiatives
would you support in your organization?
Greater use of risk-adjusted measures
Greater use of long-termperformance initiatives
Setting of risk-control remunerationseparately from remuneration ofrisk-taking areas of the business
Increase in proportion of remunerationpaid for group performance
Longer deferral of bonuses
Use of bonus clawbacks in the eventof poor performance over longer term
Increase in proportion of remunerationpaid for divisional performance
Greater proportion of remunerationpaid in stock
None of the above
57%
55%
39%
32%
31%
24%
20%
17%
5%
Respondents were allowed multiple responses. Source: 2009, KPMG International
42%orespondentshavemadeorexpect
tomakeundamentalchangestorisk
management
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGrnational have any such authority to obligate or bind any member firm. All rights reserved.
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Rethinkingbanksapproach
toriskmanagement,continued
KPMGcomment:
Theneedortrulyintegratedriskmanagement
Thecreditcrisisbringsmanybanksoverallriskgovernanceintoquestion,withsome
lackingtheramework,thepoliciesorthenecessarycapabilitiestoachieveaclearpicture
otheriskstheyareacingacrosstheorganization.
Ingrowingthebusiness,executiveteamsshouldtrytoensurethatallemployeesare
awareoandinvolvedinmanagingrisk,withseniormanagementsettingtheoverall
strategicdirectionandembeddingriskmanagementphilosophyacrossthebusiness,
ensuringthatriskcanbemeasured,reportedandmanaged.Theyshouldalsoprovide
clearguidancerefectedinexplicitpoliciesandproceduresandaclearexpectationo
compliancewiththese.
Strongperormerstendtohaveclearlinesocommunication,withtherisk
managementunctionintegratedintothebusiness,allowinginsightsandindustry
bestpracticetobeshared.Riskmanagementresponsibilitiesshouldbestreamlinedsothatriskcanbeownedand
managedwithinthebusinessunit,butquicklyescalatedthroughtheriskmanagement
unctionandbusinessunitstotheBoardanditsrelevantcommitteeswherenecessary.
Whentheyareworkingwell,thesethreelinesodeensegiveprimaryresponsibilityor
riskmanagementtotheclient-acingareasothebusiness;supportunctionsreviewand
checkthatrisksareacceptedinlinewiththeinstitutionspoliciesandappetite;andnally
internalauditprovidesassurancethattheinternalcontrolsandriskmanagementare
operatingasexpected.
Reliablequantitativeandqualitativeinormationshouldeedupromthebusinessunitsto
seniormanagementandtheBoardandbedeliveredtodecisionmakersinatimelyashion.
Rethinkingbanksapproachtoriskmanagement |
2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGInternational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGInternational have any such authority to obligate or bind any member firm. All rights reserved.
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Howshouldriskproessionalsinuencecompensationincentives?
InanOctober2008lettertoCEOsoleadingnancialcompanies,theUKFinancial
ServicesAuthority(FSA)notedthatrmspossiblyrequentlygaveincentivesto
statopursueriskypoliciestothedetrimentoshareholdersandotherstakeholders.
TheFSAwantstoseewideruseoincreaseddeerraloannualbonusesandthedelivery
oincentivesinsharesratherthancash,withperormancemeasureslinkedtorisk.Theletter
makesacaseortheriskunctiontohaveastrongandindependentroleorsetting
compensationorthebusinessareas.
AccordingtoKevinBlakely,PresidentandCEOoTheRiskManagementAssociation,
thismeansactingasanagitatorratherthananadministrator:Compensationisthe
responsibilityotheBoard,thecompensationcommitteeandtheCEO,buttheCRO
shouldhaveadirectinputintopolicytoensurethatriskistakenintoconsideration.
Inaseparatereport,theInstituteoInternationalFinanceestablishedaspecialCommittee
onMarketBestPractices(CMBP),whichalsoarguesorcompensationincentivestobe
basedonperormanceandalignedwithshareholdervalueandlongterm,organizationwideprotability.Italsosuggeststhatcompensationincentivesshouldinnowayinduce
risktakinginexcessotheorganizationsriskappetiteandthatthepayoutobonuses
shouldbecloselyrelatedtothetimingoriskadjustedprot.
Althoughsomeothecasualtiesothecurrentcrisisclaimtohaveverylong-termincentive
plansthataredirectlylinkedtoshareprice,thisdoesnotappeartobeconsistentacrossthe
industry.Withmanybanksunderpartialorcompletegovernmentownership,banksare
likelytobeunderconsiderablepoliticalpressuretoshowregulatorybodiesthattheir
compensationandincentivesystemsareriskbased.
1. Letter rom Hector Sants, Chie Executive, Financial Services Authority to CEOs o leading fnancialservicescompanies, October 13, 2008.2. Report o the Institute o International Finance (IIF) Committee on Market Best Practices (CMBP),J uly2008.
| Rethinkingbanksapproachtoriskmanagement
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGrnational have any such authority to obligate or bind any member firm. All rights reserved.
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Theemerginginuence
otheriskunction
Theemerginginuenceotheriskunction |
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Thesurveysuggeststhatalthough
riskmanagementisslowlystarting
toplayamorecentralroleinbanks
decision-makingstructures,many
respondentseelthatriskhasstill
tosheditstraditionalimageasa
supportunction.
The growing importance o the risk
unction in banking is refected in ourndings. Seven out o ten taking part
believe that the risk unction holds much
greater infuence than two years ago
and eight out o ten see the way they
manage risk as a source o competitive
advantage (as opposed to merely
providing checks and balances). Yet it
seems that there is still a long way to go,
with the vast majority concerned that risk
management continues to be stigmatized
as a back room unction.
Encouragingly, two o the areas
where the CRO or equivalent is startingto exert considerably greater authority
are strategy development and capital
allocation. This is a logical development
as banks seek to integrate risk and
capital into their planning to ensure they
do not over stretch their capacity in
pursuit o prot. Six out o ten survey
participants eel that the CRO should
have even more infuence over the
development o strategy, although in
light o recent events this gure could
arguably be even higher. Overall it
appears that the desire to manage risk
at a strategic level has not ully ltered
down to more practical issues.
Although banks may be concerned
about the apparent lack o involvement
o the CRO in mergers and acquisitions,
much o this is probably due to a relative
lack o deals over the previous two
years. However, the recent increase
in activity in this area with the more
stable institutions buying out their
troubled compatriots calls or rigorous
risk assessment o purchase targets.
Chart 5 How is risk management viewed in your organization?
Compared with two years ago, our riskfunction holds much greater influencewithin the organization
1 Strongly agree 2 3 4 5 Strongly disagree
Source: 2009, KPMG International
Risk management is too oftenstigmatized as a support function
Risk management is an essential sourceof competitive advantage
27% 44% 19% 2%
36% 40% 15% 2%
48% 33% 14%
8%
7%
5%0%
Chart 6 Change in degree of influence held by your
CRO/head of risk (in the past year)
New product development
1 Significant increase 2 3 4 5 Significant decrease
Source: 2009, KPMG International
Strategy development
Investments in new geographic markets
Pricing, loans, deposits etc
Setting compensation policies
Mergers and acquisitions
Assessment of businessunit performance
Investments in new technology
Capital allocation
13% 35% 42% 2%
16% 44% 32% 1%
12% 31% 42% 2%
11% 22% 46% 5%
13% 35% 40% 2%
5% 20% 54% 4%
10% 38% 39% 2%
16% 37% 36% 1%
10% 32% 43% 2%
8%
7%
13%
16%
10%
17%
11%
10%
13%
| Theemerginginuenceotheriskunction
76%orespondentsstilleelriskis
stigmatizedasasupportunction
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGrnational have any such authority to obligate or bind any member firm. All rights reserved.
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Theemerginginuenceotheriskunction |
Theemerginginuence
otheriskunction,continued
Buildingastrongerriskculture
Nearly eight out o ten (77 percent)
survey participants claim they will be
striving harder to improve their risk
culture and eel that the single most
eective way to achieve this is through
clear leadership rom senior executives.
Those respondents working at the C
level (CEO, COO, CFO, CRO, etc) areparticularly keen on establishing what
is reerred to as greater tone rom
the top.
In a urther reerence to the oten-
marginalized role o risk proessionals,
hal o those we surveyed believe that
cultural change would be hastened by
giving the unction greater authority
in the organization. Despite the
act that employee rewards are not
high on the agenda o the CRO, there
is at least some acknowledgement
that the way sta are rewarded hasa big impact on culture, with our out
o ten arguing or incentives linked to
eective risk management.
Chart 7 Expected change in attention
to risk culture (over the next year)
Significant increase 30%
Slight increase 47%
Neither increase nor decrease 20%
Slight decrease 2%
Significant decrease 1%
Total 100%
Source: 2009, KPMG International
2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGInternational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGInternational have any such authority to obligate or bind any member firm. All rights reserved.
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In many banks, the right hand side didnt
know what the let hand was doing.Kevin Blakely, President and CEO, The Risk Management Association
Communicatingwith
therestotheorganization
When asked to list the actors that
contributed to the current predicament
in the industry, only two in ten banks
(21percent) eel that a lack of effective
communication across organizational
silos played a part.
However the respondents do recognizethe need or improvement, with better
communication between the risk
unction and the business being seen
as one o the most important ways
to improve overall risk management,
with a majority committed to making
such changes.
A more detailed look at communication
and inormation sharing across the
business reveals a number o
inconsistencies that could aect the
management o risk. The risk unction
claims to have developed much closer
relationships with the senior executive
team and the Risk Committee,
suggesting that those involved in majorstrategic decisions are likely to consider
the wider implications or the business.
However, there is also evidence that
such high-level risk management is
not carried down to operational level;
respondents admit that there is room
or greater interaction with the lines o
business and internal audit, and also
between the risk committee and the
audit committee. Such a weakness in
communication enables business unit
managers to take on large risks without
consulting urther up the management
chain. Furthermore, with internal audit
expected to play a greater role in risk
management as the third line odeense, senior managers will want
to see acloser relationship between
the internal audit and risk functions.
Chart 8 Communication and sharing of information between the following function/teams
Independent risk functionand finance function
1 Very effective 2 3 4 5 Not at all effective
Source: 2009, KPMG International
Risk function and senior executive team
Risk function and lines of business
Risk function and risk committee
Risk committee and audit committee
Risk function and internal audit function
Risk function and regulators
19% 43% 25% 1%
26% 46% 20% 2%
14% 43% 31% 3%
15% 43% 28% 3%
29% 42% 20% 3%
16% 39% 33% 5%
19% 41% 30% 3%
12%
6%
9%
11%
6%
7%
7%
| Theemerginginuenceotheriskunction
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGrnational have any such authority to obligate or bind any member firm. All rights reserved.
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Theemerginginuenceotheriskunction |
Theemerginginuence
otheriskunction,continued
Whereispressuretochange
comingrom?
The biggest pressure on risk
proessionals appears to be coming
rom regulators and executive
management, but not as might be
expected rom non-executive Board
members. This may be at least partly
down to the shortage o risk expertise
o Board members and reinorces
the suspicion that risk is viewed as
a regulatory rather than a business
issue, hence the lack o authority o the
risk unction. I banks are to avoid the
problems that have plagued them in the
past two years, non-executives will have
a key role in providing an independent
challenge to risk management.
Chart 9 Change in pressure exerted by stakeholders to improve risk management (over past year)
Regulators
1 Significant increase 2 3 4 5 Significant decrease
Source: 2009, KPMG International
Investors
Executive management
Customers
Ratings agencies
Non-executive Board
Analysts
Central banks
Governments
34% 39% 24 1%
17% 34% 40% 2%
21% 49% 25% 1%
14% 35% 44% 1%
9% 25% 50% 3%
14% 33% 44% 2%
12% 33% 45% 3%
16% 32% 41% 3%
25% 33% 36% 3%
2%
7%
4%
6%
13%
7%
7%
8%
3%
2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGInternational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGInternational have any such authority to obligate or bind any member firm. All rights reserved.
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KPMGcomment
Developingarobustriskculture
Banksshouldsetrealisticlimitsonrisksthattthecultureandriskappetiteoboththe
individualbusinesslinesandtheoverallinstitution.Seniormanagershavetostrikeavery
delicatebalanceinmatchingtheacceptableleveloriskexposuretothecultureinwhich
thatriskisbeingmanaged.
Insimpleterms,theyshouldhavecondenceintheirownriskcultureandthecourage
tobeabletosay:Althoughwearemakingalotomoneyhere,additionalriskwillnot
resultinadditionalvaluebeingaddedtothebusinessinthelongterm.
Thejobthenistocreateasystemogovernancewhereriskcanbemanagedand
whereeveryindividualintheorganizationunderstandstheappetiteorriskandtheir
partinmitigatingit.Thisshouldhelppreventthoseinthelinesobusinessdelegating
responsibilityorriskmanagement.ThisappetiteshouldbeagreeduponatBoardlevel
andbetheoundationorboththecultureandthesystemocontrolswithintheorganization.Oncethisappetiteisclear,potentialdecisionssuchastakingonloan
portolioscanbeassessedinthecontextowhatriskisacceptable.
TheRiskCommitteealsohasavitalroletoplay;yetaquarterorespondentsinthe
surveyhavenoplanstoevenormsuchaorum.WritingintheFinancial Timesin
October2008,EmilioBotn,Chairman,BancoSantander,notedthat:Manyaresurprised
tolearnthattheBancoSantanderBoardsRiskCommitteemeetsorhaladaytwicea
weekandthattheBoards10-personexecutivecommitteemeetseveryMondayorat
leastourhours,devotingalargeportionothattimetoreviewingrisksandapproving
transactions.Notmanybanksdothis.Itconsumesalotoourdirectorstime.Butwend
itessentialanditisnevertoomuch.
| Theemerginginuenceotheriskunction
Every employee should understand
the organizations appetite or risk.
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGrnational have any such authority to obligate or bind any member firm. All rights reserved.
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Theemerginginuenceotheriskunction |
1
Theemerginginuence
otheriskunction,continued
Botnalsoeelsthat:Riskispartothedailyconversationandviewedroman
enterprise-wideperspectiveriskmanagementnotonlyhasaseatatthetable,
butisalsoanactiveparticipantinallkeybusinessdecisions.
KevinBlakely,PresidentandCEO,TheRiskManagementAssociation,alsoemphasizes
theimportanceotheriskcommittee,whichhebelievesshouldoverseetheactive
acceptanceoriskwithintheorganizationandmakesureitsmitigated,managedand
pricedor.
Headds:TheCROshouldbeacentralpartothestrategicplanningprocessandbe
involvedinanymajordecisionsinvolvinginitiativesromthelinesobusiness.Idont
thinkthisishappeningsucientlyandisamajorfawinenterpriseriskmanagementin
bankslargeandsmall.Hegoesontosaythat:Withsuchaweakinormationcirculatory
system,inmanybankstherighthandsidedidntknowwhatthelethandwasdoingand
seniormanagementdidnotknowitsoverallexposure.
Willriskberegulatoryorinternallydriven?
Intheabsenceoagloballycoordinatedresponseromthebankingindustry,centralbanksandtheirregulatorsaslendersolastresorthavetakentheleadinrescuingand
tosomeextentremoldingthesector.Emergingregulatorychangeswilldemandgreater
transparency,betterriskmanagementandstricterriskgovernance,withbankspossibly
havingtoaugmenttheirBoardswitharelevantriskspecialist.
2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGInternational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGInternational have any such authority to obligate or bind any member firm. All rights reserved.
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| Theemerginginuenceotheriskunction
Exactlyhowregulatorswillbeinvolvedinthemanagementorisksinbanksisunclear
buttheyarelikelytobemorehandson.
Governmentsinmanycountrieshavehadtostepintothebreachtorestorecondence
andcalmtotheirnancialservicesmarkets.Suchhelpcomesatapricehowever,with
numerousconditionsthatdirectlyimpactbanksandhavewiderimplicationsorthe
globaleconomy.
Sincetherecapitalizationomanybanks,theconceptotheregulatorasakeydriver
ochangehasbecomearealitywithmanyinstitutionsgenuinelyshockedatthecapital
levelstheyhavebeenobligedtohold.Banksmaynotbeabletoresistcallsothissort
unlesstheyprovetoregulators,policymakersandthepublicthattheyhavetakenthe
appropriateactiontostrengthentheirownriskmanagementprocedures.
Someriskmanagementagendasandbudgetsinrecentyearsappeartohavebeen
drivenbytheneedtomeetregulatoryexpectationssetbysuchinitiativesasBaselII,
CSE,andSarbanes-Oxley.Suchacomplianceocusmaypossiblyhavedistractedrisk
managementresourcesromaddressingwiderorganizationalrisks.3. Bankings mission must be to serve its customers Emilio Botn, Chairman o Banco Santander, Financial Times, October 16, 2008
19
...risk management not only has a seat at
the table, but is also an active participant
in all key business decisions.Emilio Botn, Chairman, Banco Santander
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGrnational have any such authority to obligate or bind any member firm. All rights reserved.
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Riskexpertiseacrosstheorganization |
Riskexpertiseacross
theorganization
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A signicant minority o banks has no plans
to appoint individuals with deep practical
risk experience to senior positions.
Chart 10 Our organization does
not have sufficient risk expertise
at Board level
Strongly agree 16%
Slightly agree 29%
Neither agree nor disagree 21%
Slightly disagree 20%
Strongly disagree 14%
Total 100%
Source: 2009, KPMG International
Whileacknowledgingthelacko
riskexperienceandskillsamongst
seniorexecutiveandnon-executive
management,thebankstakingpart
inthesurveyappeartohavebeen
slowtoaddressthisshortage.
Only our out o ten respondents
admit that insucient risk expertise
at Board level was a contributory actorin the credit crisis, and under hal
(45 percent) believe that their own
organization lacks such know-how at
the very top. Both these gures are
considerably lower than may have been
expected, given the risks that some
banks may have taken in the lead up
to the current troubles.
When asked what would most
improve risk management, the number
one response (45 percent) was: Better
in-house skills and experience, with
over a third admitting that they need
greater risk expertise at the very top.Interestingly, respondents rom North
America and Europe are considerably
more condent in their in-house
knowledge than their counterparts
in other regions.
Chart 11 Which of the following would most improve risk management
in your organization?
Better in-house skills and experience
Respondents were allowed multiple responses. Source: 2009, KPMG International
Better communication between riskfunction and the business
Greater level of risk expertise at thetop of the organization
Stronger organizational risk culture
Greater degree of cross-over oftalent between business lines andthe risk function
Stronger support from the management
A more strategic role for the risk function
Better industry training to developexpertise in risk management
Bigger head count in risk management
45%
40%
35%
29%
29%
27%
25%
24%
15%
| Riskexpertiseacrosstheorganization
45%orespondentsbelievethattheir
ownorganizationlacksriskexpertise
attheverytop
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGnational have any such authority to obligate or bind any member firm. All rights reserved.
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Riskexpertiseacross
theorganization,continued
Arebanksllingtheskillsgap?
Despite this apparent awareness
o their shortcomings, a signicant
minority o banks has no plans to
appoint individuals with deep practical
risk experience to senior positions.
A third (33 percent) are not actively
seeking such skills or the non-executive
Board, which puts a question mark overthe extent o their commitment to truly
independent risk assessment o
strategic and commercial decisions.
Surprisingly, less than three in
ten (29 percent) o respondents eel
that lack o skills and experience was
a causative actor leading up to the
current crisis. Regardless o this,
across the organization as a whole,
people, skills and training are
considered to be by ar the single
biggest investment priority or banks.
Chart 12 Expertise of individuals or entities on your Board
Executives with deep practicalexperience in risk management
Source: 2009, KPMG International
Non-executives with deep practicalexperience in risk management
Risk committee
21% 26%53%
25% 33%42%
19% 22%59%
Yes, we currently have No, but we are planning to appoint
No, and we have no plans to appoint
Chart 13 Priority areas for investment in
risk management (over the next year)
People (skills and training) 62%
Technology 20%
Data 11%
People (head count) 7%
Source: 2009, KPMG International
Riskexpertiseacrosstheorganization |
2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGInternational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGInternational have any such authority to obligate or bind any member firm. All rights reserved.
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| Riskexpertiseacrosstheorganization
23
KPMGcomment
Aneedorgreaterknowledgeandexperience
Theindustryasawholeisprobablyawareotheshortageoindividualswithrisk
managementskillsandpracticalexperience,particularlyataseniorlevel.Muchothisexpertiseappearstobeconcentratedincertainbanks,yetevenintheseinstitutions,
thosewithriskexperiencemaynotbeullyinvolvedinmajorstrategicdecisions.
Thoseworkingintheriskunctionmayalsoneedtoimprovetheirskillsandindeed
raisetheproleotheunctionbyinvestinginpeopleandtraining.Withriskmanagement
clearlyunderthespotlight,itisnorealsurprisethatpeoplearetobethenumberone
investmentarea.
TheSeniorSupervisorsGroup(SSG)(comprisingseniorsupervisorsomajornancial
servicesrmsromFrance,Germany,Switzerland,theUnitedKingdom,andtheUnited
States)reportromMarch20084concludesthatsomeotheexecutiveleadersatrms
thatrecordedlargerlossesdidnothavethesamedegreeoexperienceincapitalmarketsanddidnotadvocatequick,strong,anddisciplinedresponses.
Thereportgoesontoargueortheselectionoexecutiveleaderswithexpertiseinarange
orisks,giventhatitisverydiculttopredictthesourceothenextdisruptiontothemarket.
Seniormanagementteamsasawholeshouldtrytomaintainariskproleconsistentwith
theBoardandseniormanagementstoleranceorrisk.
EmilioBotn,Chairman,BancoSantander5believesthat:theBoardmustknowand
understandbankingThisisacomplexindustry,subjecttoconstantchangeandinnovation.
Whatisneededaredirectorswhoknowthebusinesswell.
Thereisalsoastrongargumentormoreexpertiseacrosstheorganization.Thethree
linesodeensemodelplacestheprimeresponsibilityorriskmanagementwiththe
clientacingareasothebusiness.Yetinanumberocasesthoseworkinginthelines
obusinesshavenothadsucientaccountabilityortheiractionsandhavelacked
awarenessotheorganizationsoverallriskappetite.Thisisprobablydowntothe
underlyingorganizationalcultureandsomethingthatcanbeaddressedthroughtraining
andimprovedcommunication.
4. Observations on Risk Management Practices during the Recent Market Turbulence Senior Supervisors Group report, March6,2008
5. Bankings mission must be to serve its customers Emilio Botn, Chairman o Banco Santander, Financial Times, October 16, 2008
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGrnational have any such authority to obligate or bind any member firm. All rights reserved.
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Toolsormeasuring
andmanagingrisk
Toolsormeasuringandmanagingrisk|
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| Toolsormeasuringandmanagingrisk
Manybanksinthesurveyrecognize
thelimitationsinthewaythey
manageandreportdataandplan
toocusmoreonstresstestingand
scenarioanalysis.However,thereis
aquestionmarkoverwhetherany
newapproachesarefexibleenough
tomakeaccuratepredictions.
The way that risk is reported andmeasured played a signiicant part in the
credit crisis, according to those involved
in the survey. Almost eight out o ten
respondents (78 percent) are planning
to pay more attention to this issue, with
a similar proportion looking to improve
risk systems and data quality.
Whatisdrivingthechangein
approachtoriskmeasurement?
The survey shows that banks have
been employing a wide variety o
approaches to manage risk, although
the use o Basel II credit risk models
has been surprisingly low, given the
regulatory pressure to take up such
a tool.
Chart 14 Expected change in attention to the following over the next year
Risk systems and data quality
1 Significant increase 2 3 4 5 Significant decrease
Source: 2009, KPMG International
Reporting and measuring risk
24% 46% 26% 1%
27% 51% 18%
3%
1%3%
Chart 15 Reliance on the following approaches to measure and manage risk (up to now)
Value at risk
1 Extremely reliant 2 3 4 5 Not at all reliant
Source: 2009, KPMG International
Basel II credit risk models
Stress testing
Gross limits
Leverage limits
Scenario analysis
16% 45% 22% 8%
14% 36% 23% 13%
14% 34% 32% 5%
15% 36% 32% 6%
18% 38% 32% 4%
16% 31% 33% 7%
9%
14%
15%
11%
8%
13%
61%orespondentswillbeplacing
moreemphasisonstresstesting
andscenarioanalysis
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGrnational have any such authority to obligate or bind any member firm. All rights reserved.
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Toolsormeasuring
andmanagingrisk,continued
Chart 16 Expected change in reliance on the following tools to measure and manage risk (over the next three years)
Value at risk
Increased reliance No change Decreased reliance Not applicable
Source: 2009, KPMG International
Basel II credit risk models
Stress testing
Gross limits
Leverage limits
Scenario analysis
45% 45% 5% 5%
48% 39% 4% 9%
61% 33% 3%3%
61% 33% 3% 3%
33% 56% 5% 6%
34% 52% 5% 9%
Toolsormeasuringandmanagingrisk|
In the uture, respondents will be
placing a stronger emphasis upon stress
testing and scenario analysis to help
measure and manage risk. This is an
acknowledgement that recent analysis
was not suiciently robust to deal with
the systemic risks in the market at
the time. Arguably this increased
ocus on measurement may also be
a precautionary move, given that
some regulators are starting to insist
on certain levels o stress testing as
a minimum requirement in order to
maintain capitalization and capital
allocation levels.
2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGInternational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGInternational have any such authority to obligate or bind any member firm. All rights reserved.
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| Toolsormeasuringandmanagingrisk
27
Willtheuseoeconomiccapital
reducerisk?
The vast majority o survey
participants uses or plans to use
economic capital to estimate capital
requirements, although in only a fifth
o cases (21 percent) is this currently
ully embedded. This trend, along with
the substantial increase in relianceon Basel II models, creates a dilemma
or banks: with a potential backlash
against quantitative approaches that
are based on static, historical data;
can risk proessionals develop more
sophisticated, fexible models?
Chart 17 Current approach
to economic capital
We do not use economic capitaland have no plans to introduce it 16%
We do not use economic capital
but plan to introduce it 22%We use economic capitalbut it is not fully embeddedin our organization 37%
We use economic capitaland it is fully embedded inour organization 21%
We are reducing our useof economic capital 4%
Source: 2009, KPMG International
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGrnational have any such authority to obligate or bind any member firm. All rights reserved.
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Toolsormeasuring
andmanagingrisk,continued
KPMGcomment:
providingatruepictureochanginglevelsorisk
Thecreditcrisishashighlightedsomespecicchallengesinhowbanksmanagerisk,
withperhapsthebiggestconcernbeingtheapparentoverrelianceonquantitativemodelsindecision-making.Eventhosethatusedmoresophisticatedmodelsandtestingwere
notalwaysabletopredictwhatwaseectivelyaonceinalietimesetocircumstances.
Thereappearstohavebeenalackoqualitativeassessmentotherisksandexposures
beingtakenon.Whilequantitativetechniquesarelikelytohaveanimportantroletoplay,
theseshouldbeaugmentedbythejudgmentothosewithextensiveriskmanagement
andwiderbusinessexperience.
Measuringriskisclearlyanintegralpartoeectiveriskmanagementandtheuse
oadaptiveratherthanstatictools(suchasValueatRisk)shouldprovidemorereliable
indicatorsoutureperormance.Intheleaduptothecurrentcrisis,manybanksscenarioplanningwasnotsucientlyrobust,leavingseniormanagementunabletoaccurately
stresstestdierentoptions.Futurescenariosshouldincorporatetheviewsoexperienced
businessandriskproessionals,aswellasthoseoregulatorsandotherpeers.
ThemandatorysurvivaltestsorcapitallevelssetbytheFederalReserve,FSAand
otherauthoritiesarelikelytoimpactprotabilityandde-leveragethebalancesheet.
Suchtestswillalmostcertainlyrequiregreateruseostressandscenarioanalysisand
consequentlywearelikelytoseeanewgenerationomodelsandanewalignmentorisk
managementtechniques.
However,amodelisonlyasgoodasitsbuilt-inassumptionsanditsinput,whichinmanybanksarrivesinvaryingormsatdierenttimesromdisparatesourcesaroundthe
organization.ThiswashighlightedintheatermathotheLehmanBrotherscollapse,
wheresomeindustryparticipantsstruggledtoidentiyalltheirrelevantexposuresto
Lehmanacrosstheirgroupstructures.Intheuture,banksshouldbeaimingtoconsolidate
theirexposuresintoasingle,consistentsourceoanalysisotheirpotentialrisks.
Toolsormeasuringandmanagingrisk|
2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGInternational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGInternational have any such authority to obligate or bind any member firm. All rights reserved.
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TheBaselIIcapitalrameworkcurrentlyusedbythemajorityobankscanbe
strengthened,encouragingmanagementtodevelopmoreorward-lookingapproachesto
measuringrisk.Thesewouldgobeyondsimplymeasuringcapitalandincorporateexpert
judgmentonexposures,limits,reserves,liquidityandcapital.Togiveitrealteeth,economic
capitalshouldbetiedintoexecutivecompensationsothatrewardsarebasedupontheeconomicvaluebroughttotheorganization.
AccordingtotheSeniorSupervisorsGroupreport6,thoseorganizationsthatperormed
wellthroughthecrisisweredistinguishedbytheorderlyandtimelyfowoinormation.
Manybanksshouldconsiderreviewingtheirinormationcirculatorysystemtoovercome
weaknessessuchas:varyingvolumesandqualityoinormationromdierentpartsothe
organization;timelinessodata;duplicationoinormationasaconsequenceohavingtoo
manydierentsources;lackounderstandingastowhatinormationisneeded,who
shouldsupplyitandwhereitshouldbesent.
6. Observations on Risk Management Practices during the Recent Market Turbulence Senior Supervisors Group report, March6,2008
| Toolsormeasuringandmanagingrisk
29
Banks must get data rom
enough sources to provide a
true picture o changing levelso risks.
Quantitative analysis should be
augmented by the judgment
o those with extensive risk
and business experience.
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGnational have any such authority to obligate or bind any member firm. All rights reserved.
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Conclusions:movingorward |
Conclusions:
movingorwardSince the very rst credit was extended, banks have amassed
vast experience in managing risk, which makes the risk
management weaknesses exposed by this crisis all the more
surprising. These weaknesses have been compounded by the
global nature o the banking system, with ew parts o the worldeconomy immune to the impact o the crisis. Moving orward,
nancial institutions should get back to basics through a renewed
ocus on understanding the risks that they take. By strengthening
their risk governance regimes, they should help to make them
more fexible to meet changing conditions.
The ndings rom this survey point to a
number o key improvements that banks
should consider:
Improvinggovernanceand
creatingariskculture
By establishing an appropriate,
enterprise-wide ramework within
which risk can be measured, reported
and managed, banks can create a
simpler system incorporating the
three essential elements o an
eective risk regime: governance,
reporting and data, and processesand systems. Firm, visible leadership
rom the very top can help embed a
risk philosophy and culture across the
organization, with every employee
ully aware o the organizations
clearly articulated risk appetite and its
impact on decision making.
Raising the prole o risk
Those working in risk should seek to
build stronger relationships with all
levels o the organization, in particular
the lines o business, Board, audit
committee and internal audit.
Improving risk expertise
at senior levels
As a matter o urgency, banks
should be looking to acquire greater
risk know-how within their senior
executive and non-executive Boards,
helping to provide a more robust
and inormed challenge to
business decisions.
Risk models should support but
not drive decision making
Eective risk management is
essentially about good judgment supported by appropriate quantitative
data presented in a clear, simple
ormat that the Board and other
stakeholders can understand. Risk
models should be less rooted in
historic data and lexible enough to
adapt to changing market conditions.
Addressing incentives head on
Risk managers should play a role
in promoting the principles o
compensation policy (which would
be developed by the compensation
committee), with incentives based
on perormance and aligned with
shareholder interest and long-term,
organization-wide proitability. Such an
approach should also help to reduce
the intervention o the regulators.
2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGInternational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGInternational have any such authority to obligate or bind any member firm. All rights reserved.
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| Participantsandmethodology
Participants
andmethodologyAlltheresponsesweregathered
throughonlineinterviewsinOctober
2008withover500seniormanagers
involvedinriskmanagementrom
leadingbanksaroundtheworld.
Theinterviews,carriedoutbythe
EconomistIntelligenceUnit,covered
arangeoquestionsrelatingto
riskmanagement,withparticular
reerencetotheglobalcreditcrisis.
Over halfo the respondents
work directly in the risk function for
involved in organizations corporate,
retail, investment and private banking,
as well as asset management. Seven
out of ten (72 percent) have a CRO or
equivalent. Twenty percent had assets
over US $500 billion and thirty fivepercent over US $250 billion.
Chart 18 Participants main functional roles (up to three)
Risk
Source: 2009, KPMG International
Strategy and business development
Research and analytics
Operations
Customer relations
General management
IT
Legal and compliance
Sales
Origination
Marketing
Trading
Other
53%
25%
22%
18%
13%
11%
10%
7%
7%
7%
6%
6%
12%
Chart 19 Global assets
of participants in US$
Less than US$250 bn 65%
Between US$250 bn
and US$500 bn 15%
Greater than US$500 bn 20%
Source: 2009, KPMG International
009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGrnational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGrnational have any such authority to obligate or bind any member firm. All rights reserved.
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Contacts |
ContactsAmericas
US
Michael Conover
+1 212 872 6402
James Liddy
+1 212 909 5583
Diana Lowe
+1 416 777 [email protected]
Greg Matthews
+1 212 954 7784
Jitendra Sharma
+1 212 872 7604
Europe
Nigel Harman
+44 20 7311 5291
Jrg Hashagen
+49 69 9587 2787
Fabiano Gobbo
+39 02 676431
David Sayer
+44 20 7311 5404
Volker Thier
+49 69 9587 2679
AsiaPacifc
John HH Lee
+60 3 7721 3388
Rachael Phelan
+61 3 9288 5896
Chee Meng Yap
+65 6213 2888
2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are offiliated with KPMG International. KPMGInternational provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third party, nor does KPMGInternational have any such authority to obligate or bind any member firm. All rights reserved.
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The information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavor to provide accurate andtimely information, there can be no guarantee that such information is accurate as of the date it isreceived or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation.
The views and opinions expressed herein are those of the survey respondents and do notnecessarily represent the views and opinions of KPMG International or KPMG member firms.
2009, KPMG International. KPMGInternational is a Swiss cooperative. Memberfirms of the KPMG network of independentfirms are affiliated with KPMG International.KPMG International provides no clientservices. No member firm has any authorityto obligate or bind KPMG International orany other member firm vis--vis third parties,nor does KPMG International have any suchauthority to obligate or bind any member firm.All rights reserved. Printed in the UK.
KPMG and the KPMG logo are registeredtrademarks of KPMG International, aSwiss cooperative.
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