Financial institutions banking on risk management

NEW YORK — A survey from Grant Thornton LLP and the Golub Center for Finance and Policy (GCFP) at the Massachusetts Institute of Technology (MIT) examines U.S. regulatory responses to the 2008 financial crisis.

The Risk Management Function of the Future survey focuses on bank risk management practices in the United States and sheds light on the issues affecting the current financial regulatory debate in Washington.

Grant Thornton and the GCFP’s survey of senior officers from U.S. banks comprises 42 questions looking ahead over a three- to five-year time horizon. The survey also includes a companion piece focused on how regulatory experts feel about systemic risk – and the costs and effectiveness of regulations.

The survey yielded four main findings:

  • Regulatory compliance remains a driving force in risk management.
  • Banks’ risk management functions are increasingly utilized for revenue-generating purposes.
  • The risk management function is evolving to exploit emerging technologies and cover a broader range of risks, including non-financial.
  • Risk management is becoming more prominent in bank culture.

“Banks’ risk management priorities range from compliance and culture to technology and efficiency,” said Jose Molina, principal in Grant Thornton’s Financial Services industry practice. “Banks recognize the potential of adopting risk management activities that add business value, but these activities have yet to evolve into sustainable business-as-usual practices.”

The survey also reveals there is room for better consensus between bankers and regulators about regulatory reform.

According to MIT Sloan Professor and GCFP Academic Director Deborah Lucas: “The question of whether regulations are having the intended effect of improving risk management practices at banks remains open as disagreements exist between bankers and regulatory experts about the effectiveness and burden of current regulations. But the survey does shed light on how banks have responded to post-financial crisis regulatory mandates, and this information should prove useful as policymakers in Washington consider new approaches to bank regulation.”

Molina expects banks to continue “doubling down” on risk management: “Most banks believe they have not yet realized the full potential of efficiencies in data and risk information management. And most institutions plan to invest more in risk management functions in the next three to five years than they have in the past three years. Plus, three-quarters of banks expect their lines of business to assume increasing responsibility for risk management activities.”

Although chief risk officers are gaining influence, Molina believes institutions are embracing the notion that risk can no longer be relegated to compliance and isolated risk management functions. “The holistic embrace of risk management is more fundamental to the business of banking than almost any other industry,” he said.

Frank Saavedra-Lim, Operations Risk managing director for Grant Thornton, echoes this sentiment: “Banks that are moving up the maturity ladder view compliance and risk management as two sides of the same coin; they’re thinking about a future-state framework that incorporates non-financial risks and creates value for the enterprise. The risk management function of the future is holistic, embracing risk considerations in tandem with strategic, revenue-generating decision making.”

One way banks can jump start their maturation efforts is by exploring new ways to extract value from the data-analytics lifecycle, Saavedra-Lim suggests. “Technology is enabling the expansion of risk management – creating opportunities for risk management activities to be performed wherever an institution is taking on risk.”

Still, for all the aspirational thinking, the costs of regulatory programs remain a huge concern for banks: Nearly two-thirds of banks identify capital requirements and CFPB consumer protection regulations as significant drains on resources; more than three-quarters rate the cost of compliance of stress tests ‘very high’ or ‘high.’

More from Grant Thornton’s viewpoints on these focus areas, designed to provide actionable insights to banking institutions, are available here.

Carling Spelhaug
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