September 8, 2004—Financial services companies have pushed risk management further up the corporate agenda and regard reputational risk as the greatest threat to their market value, according to a new study by PricewaterhouseCoopers and Economist Intelligence Unit (EIU). Yet, it is the quantifiable risks, such as credit and market risk, which still absorb the most attention amongst financial institutions.
In a survey of more than 130 senior executives in financial institutions worldwide, 82% agreed that awareness of risk is now more pervasive in their organizations than it was two years ago, and 73% agreed that their organizations define their appetite for risk more clearly. However, these results are shrouded by some significant concerns, say the researchers.
The survey identified four reasons why risk management remains primarily focused on meeting regulatory requirements and only secondarily on protecting and enhancing the value of the franchise:
- A culture of risk awareness has yet to emerge
- Compliance is not being turned into competitive advantage
- The importance of governance is underestimated
- Quantifiable risks are still the focus of too much attention
Phil Rivett, global leader, banking/capital markets group, PricewaterhouseCoopers noted, “Financial institutions have made significant strides since our last risk management survey two years ago, but our latest findings have revealed that too many organizations are still concentrating on calculating market and credit risk to a further order of accuracy and too few on understanding the totality of the risks they face in order to give themselves a competitive advantage. In an environment where new and potentially lethal risks can suddenly emerge, institutions need to look at the bigger picture.”
In PricewaterhouseCoopers’ first briefing on risk management in financial services, ten attributes were identified to help companies create a world-class culture of risk management. Two years later, PricewaterhouseCoopers believes they are as valid now as they were then:
- Pay equal attention to quantifiable and unquantifiable risks.
- Identify, report, and quantify all possible risks.
- Let an awareness of risk pervade the enterprise.
- Make risk management everybody’s responsibility.
- Avoid products and businesses the enterprise does not understand.
- Accept that uncertainty exists.
- Monitor your risk managers.
- Good risk management delivers value.
- Define and enshrine your company’s risk culture.
“Uncertainty tamed? The evolution of risk management in the financial services industry” can be downloaded from Pricewaterhouse Coopers. To order a hard copy, contact Stephanie Peters at 020 7212 6917.
