Financial services firms failing on risk management

Financial services firms should focus on getting "workable" risk datasets in place to avoid the wrath of regulators, says risk analyst firm JWG.


Financial services firms should focus on getting "workable" risk datasets in place to avoid the wrath of regulators, says risk analyst firm JWG.

Firm should have a "rethink" of the risk infrastructure they need for 2011 risk profile requirements, says the analyst.
JWG said, "After two years of scrambling to assemble new regulatory reports, firms now have a brief window of opportunity to rethink the risk information capabilities they need to satisfy both customers and regulators.  

"However, it does not appear that many are taking advantage of the chance to redesign their current risk architectures."
The firm has published a report, Getting risk information right, which is based on interviews with over 100 professionals from 30 different financial institutions, and key suppliers, academic institutions, supervisory bodies, standards organisations, law firms and trade bodies.

The report fleshes out the priorities for risk management within financial firms, and suggests that the box-ticking approach to risk data adopted so far by firms "will prove costly and ineffective in the longer term".

The paper concludes that a top-down understanding of the necessary "know your exposure" capabilities is needed to drive infrastructure requirements.

The paper found that many firms are struggling to make sense of the large volumes of complex information buried in the disparate sysems

PJ Di Giammarino, CEO of JWG, said, “Over the past two years there has been a great deal of political and regulatory scrutiny of risk management practices across the industry.

“After a flurry of rulemaking, we are now in an important phase where both firms and regulators work out how to embed better risk management capabilities. Perhaps more importantly, the competition for better capital ratios and risk management capabilities looks set to begin in the first quarter of 2011, as future investors examine the firms' risk profiles."

Giammarino said that if firms continue to "beat about the bush" fulfilling compliance obligations as a tick box exercise, not only are they going to look bad in the eyes of their customers, but the authorities may be forced to impose further, stricter measures.

While the issue of compliance has never being greater for the financial services industry in the current economic climate, some feel firms should not let the requirements of compliance get in the way of good business decisions:

Key points

  • 39% indicated that data consistency, accuracy and their ability to aggregate was insufficient to meet the new risk management requirements
  • 89% indicated that they struggle to set the right risk management strategy and allocate financial resources to exposure management
  • It is unclear whether the average spend on risk management is sufficient (£3.4 million for a large bank, £117,000 for a small bank or branch).

Now read:  Are you taking compliance too far?

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