Penalties Will Drive FIs to Improve Risk Information, Finds JWG Report

New, intrusive style of supervision being adopted across the regions hit worst by the crisis, coupled with new penalties for those who do not measure up, will drive firms to develop a new target operating model for risk management, according to research by JWG, the independent financial regulatory analysts. The report, ‘The New Business of Risk Management’, is based on interviews with over 120 professionals from more than 45 financial institutions, as well as suppliers, supervisors and other industry professionals.

As the blizzard of regulatory reform continues unabated, it has become clear that regulators are not satisfied with the manner in which firms currently manage their risk. Furthermore, new remedial tools – such as greater fines and, crucially, adjustable capital and liquidity buffers – mean that firms have a real incentive to meet their supervisors’ exacting standards. As such, the report found that the imperatives for better risk management are clear. A survey of professionals from 19 financial firms, conducted in the fourth quarter of 2010, found that:

  • Ninety percent believe improving risk data is a priority for their firm.
  • The majority thought that treasury, finance, strategic management and the front-office will all benefit from better risk information.
  • Only 32% thought that the need to improve risk information was driven primarily by regulatory compliance.
  • Nine out of 10 are confident that their firm fully understands the imperatives – both business and regulatory – for better risk management.

PJ Di Giammarino, chief executive officer (CEO) of JWG, said: “The new powers bestowed upon supervisors mean that the business case for improving risk management capabilities is clear. The questions are now ‘where to start’ and ‘how to get the most bang for your buck’.

“Firms must think beyond their immediate priorities for risk – staying in business and out of jail – to determine what their target operating model is for risk management as a whole: what their new ‘business as usual’ should look like. The most successful firms will figure out how to implement required changes, such as the new Basel III ratios, alongside those they themselves want – improved management information and investor relations.

“The first steps towards this new ‘business as usual’ are establishing targets and cherry-picking a promising project to achieve a quick win, demonstrating proof of concept. However, getting this process started often relies on senior management asking the right questions. To this end, our next risk benchmark survey will cross roles and delve deeper into what needs to be done in 2011 to get both regulatory and banking communities to this tipping point.”


Related reading

New consumer banking head for Citi Asia Pacific