What price risk?

Australian Banking & Finance, April 15, 2007 by Mike Codling

IN PUTTING PEN TO PAPER FOR MY INAUGURAL ARTICLE, I HAVE BEEN conscious of the high standards and expectations set by Peter Trout's long tenure in this column. I am also conscious that our Australian banks have set high standards and expectations for their performance over a long period of favourable conditions.

As I reflected on this--and on the daily flow of media questioning whether these conditions are shifting--my mind turned to the risk management functions at our banks, It would have been easy for them to lower their investment in risk management over such an extended period of benign conditions. How well are they placed now?

A new report by PwC and the Economist Intelligence Unit suggests that banks have in fact been investing heavily in risk management in recent years. However, the majority of the additional spend has been driven by regulatory requirements such as Basel II and Sarbanes-Oxley.

Senior executives and risk officers are now asking themselves whether there has been a commensurate increase in value contributed by the risk function to the overall bank's performance. No surprises there, perhaps.

The good news is that Australian banks fare relatively well for the degree to which they have embedded risk in the business, their setting and monitoring of risk appetite, and in building risk awareness throughout the bank.

Some 60 per cent of the Australian respondents believe that instilling a culture of risk awareness is the most important objective of the risk management function; almost double that of the global respondents.

The slightly shocking statistic is that fewer than I in 10 executives in the survey, both globally and in Australia, believe that risk management is 'very successful' at enabling managers to make better business decisions.

There is also evidence of a slight disconnect between risks and capabilities. Most banks believe they are highly effective in managing classic sources of concern such as credit risk and market risk.

Senior executives are less confident around risks that are emerging as amongst the most threatening, like people risks and third-party risks--inherent in relationships with outsourced service providers.

So, work to be done. Partly in looking at the cost of risk, because undoubtedly the rush to meet regulatory standards has caused a profusion of separate, and expensive, overlaps in governance, risk and compliance. Mostly though, in extracting maximum value from the investments already made, and in addressing the 'emerging' risks.

For some time we have seen our Australian banks focused on improving the alignment between the risk function and the business itself. Interestingly the PwC survey respondents indicated that commitment from senior executives to see risk in a more strategic light, would be the most important step towards risk management adding more value.

MICHAEL CODLING IS A PARTNER AT PRICEWATERHOUSECOOPERS AND LEADS THE BANKING AND CAPITAL MARKETS TEAM.