Less than half of financial services risk professionals believe the principles of risk management remain sound, Economist Intelligence Unit report fin

The global financial crisis has exposed fault lines in the management of risk across many sectors of the financial services industry. Faced with a massive erosion of confidence among key stakeholders, and the prospects of difficult times ahead as the industry seeks to rebuild itself, risk professionals are now questioning the very foundations of risk management. According to findings from a new Economist Intelligence Unit report entitled After the Storm: A new era for risk management in financial services, which is sponsored by SAS, a business analytics software and services firm, less than half of risk professionals in the industry believe that the principles of risk management remain sound.

This suggests that fundamental changes to risk management are required – not just better execution. Indeed, out of the 334 senior risk professionals from the industry questioned for this research, 53% say that they have conducted, or plan to conduct, a major overhaul of their risk management in response to the crisis. The findings also highlight a lack of understanding between the risk function and the broader business, with just 40% of respondents indicating that the importance of risk management is widely understood throughout the business.

In their efforts to overhaul risk management, key areas of focus for the survey respondents include the strengthening of risk governance, a move towards a firm-wide approach to risk, the deeper integration of risk within the business and improvements to data quality and availability. Respondents say that the need for reform is being driven, in particular, by executive management, but that regulators are also starting to apply the pressure.

“The financial crisis has prompted a wholesale reassessment of risk management in many financial institutions as they come to terms with a dramatically changed environment,” says Rob Mitchell, editor of the report. “Firms are adopting a range of new ideas and approaches, but face a number of important cultural, technological and organisational challenges before they can successfully recalibrate their risk management.”

Other findings from the research include the following:

• The financial services industry is retreating from risk. Only around one-third of executives believe that the outlook is positive for their business in terms of either revenue growth or profitability over the next year, and less than one-third say that they are seeing confidence return to their business. This erosion of confidence is having a dramatic impact on the kind of business that financial institutions are willing to carry out, with many retreating into familiar, domestic business.
• Increased transparency is the main goal of reform. Asked about the initiatives that they thought would be most beneficial to the financial services industry, respondents pointed to greater disclosure of off balance sheet vehicles, stronger regulation of credit rating agencies and the central clearing of over-the-counter derivatives as being three among the top four that have the greatest potential benefit. Although these are wide-ranging activities, there seems to be a common theme across all of them – namely, the requirement for greater transparency and disclosure to facilitate the more effective management of systemic risk issues.
• Respondents lack confidence in the ability of supervisors to formulate the right response to the crisis. Just three in ten respondents are confident that policy-makers can formulate an effective response to the crisis. Regulators, in particular, are singled out as being a potential weak spot, with less than one-third rating their handling of the financial crisis as good or excellent (a lower proportion than for either central banks or governments).

About the research

After the Storm: A new era for risk management in financial services is an Economist Intelligence Unit report that is based on a survey of 334 senior financial services respondents from around the world and a programme of in-depth interviews with high-profile industry participants and commentators. The survey included companies from a variety of sizes and sub-sectors within the financial services industry, and all respondents have a primary focus on risk management.

About the Economist Intelligence Unit

The Economist Intelligence Unit is the business information arm of The Economist Group, publisher of The Economist. Through our global network of 650 analysts, we continuously assess and forecast political, economic and business conditions in more than 200 countries. As the world's leading provider of country intelligence, we help executives make better business decisions by providing timely, reliable and impartial analysis on worldwide market trends and business strategies.