Canada and US lag behind in risk management

Risk is climbing in the financial sector, but financial institutions in Canada and the United States lag behind other countries in managing it, according to a new study from Deloitte. Mergers, offshoring, outsourcing, overambitious lending and other factors are contributing to escalating risk. But while 81% of companies globally have created the position of chief risk officer (up from 65% in 2002), only 75% have done the same in Canada and the rest of North America.

The Deloitte 2004 Global Risk Management Survey is based on interviews with senior executives from the world’s top 162 global financial institutions. It is intended as a global benchmark for the state of risk management in the financial sector.

“Financial institutions increasingly recognize that strong risk management governance should be part of the overall business strategy,” says Leon Bloom, managing partner, global financial services industry, Deloitte. “Now more than ever, Canadian corporations need to fully assess their risk management requirements to enable them to implement the best solutions to benefit their long-term business goals. The inability to deal with risk will ultimately affect an institution’s bottom line.”

Here are some other highlights from the report:

Regulatory influence
A tougher regulatory environment (post-Enron) has contributed significantly to a greater emphasis on risk management. In 2004, the Bank for International Settlements established a revised new capital adequacy framework for banks, known as Basel II. The survey shows just over one-third of firms feel they meet the standard framework requirements. Meanwhile, the Sarbanes-Oxley Act in the US and similar legislation, such as Bill 198 in Canada, have clearly elevated the importance of corporate governance, board oversight, internal controls and financial disclosures – with the threat of criminal prosecution for non-compliance.
Enterprise risk management (ERM)
ERM continues to be an elusive goal for many institutions globally (including those in Canada), with fewer than one-quarter of survey participants saying they are able to integrate risk across any of the major dimensions of risk type, business unit or geography.
Credit risk management
Beyond regulatory developments, organizations are investing in credit risk infrastructure improvements because of growth, merger integration and competitive pressures. In the area of credit risk management, respondents reported significant progress since the 2002 survey. The influence of Basel II requirements, commercial credit market difficulties and increased lending volume spurred by low interest rates in the consumer sector have caused management to focus more attention on strengthening credit risk capabilities.
Offshoring, near-shoring and outsourcing
These new business strategy trends have brought new novel challenges into firms’ risk profiles. Communication complexities compound this problem where affiliates are operating in countries with different cultures and time zones. When it comes to offshoring, near-shoring and outsourcing arrangements across a variety of corporate functions, respondents said information technology and application management was the only area where a majority (61%) employed an extended enterprise solution (EES).
Operational risk management
ORM is still considered a relatively new field compared to more established risk management disciplines, with Canada and North and South America noticeably behind Asia-Pacific and Europe in ORM program progression.
Market risk and asset/liability management
For market risk, many firms are adding coverage of additional product types such as asset-backed securities. They have also increased their use of advanced modeling techniques such as event risk and are doing more stress testing, which indicates more attention is being paid to current market risk analysis.
Risk systems and technology
While information technology is considered the key enabler of risk management architecture, respondents report a host of challenges in developing adequate risk systems. More than half (52%) cited a lack of integration among systems as a major concern. Improving regulatory-related systems capabilities and implementing operational risk management and advanced credit risk systems were the three highest priority items cited by respondents in the systems development and technology area.

To access the study, please visit: www.deloitte.ca