Financial reforms remain
threatened by an imbalance of risk management demands and actual
programmes in place. Worse, risk cultures have been overtaken by
competing priorities that encourage growth and profitability.
Douglas Blakey reports from the Premier Business Leadership
conference in Belgium.
Go deeper with GlobalData
In the
past decade, the banking sector has displayed what may be regarded
as the three Cs: complacency, crisis and caution. Is it now
appropriate to add a fourth C for confidence?
Or has the financial services
industry reached a comfort zone, placing it in jeopardy of another
crisis? Are today’s risk management practices and reporting in tune
with existing risk culture and organisational expectations?
These questions were prominent
points for discussion at the SAS-sponsored Premier Business
Leadership conference in Antwerp in mid-June.
The conference coincided with the
release of a survey of financial services firms’ risk
professionals, commissioned by business analytics vendor SAS.
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By GlobalData
The
report concluded that complexity, poor internal communication and
increased reporting requirements endanger an ordered evolution of
risk cultures.
As a result of the cautious overall
recovery and recent strong performances in the financial sector,
firms are reporting increased risk appetites with pressure to
expand and boost profits.
But two-thirds of the survey
respondents said external risks posed a greater challenge to their
institutions than internal ones.
Yet only 52% said their risk
management processes were well placed to deal with this volatility
and complexity.
Product silos continue to hamper
risk management progress. Although the risk function has been
elevated, financial services firms continue to lack strong and open
relationships between the risk function and lines of business,
which need the most improvement.
Respondents cited poor
communication between departments as a major barrier to effective
risk management.
According to the survey, banks’
boards have increased both their risk expertise and demand for risk
reporting. More than two in five respondents indicated a rise in
the board’s risk expertise and over half reported boosted demands
for risk reporting, with the retail banking seeing the most.
But it appears that a minority of
banks are taking steps to upgrade risk reporting, including
timeliness, consistency and extent of reporting on emerging
risks
Compared to a similar report a year
ago from the Economist Intelligence Unit, the proportion of
respondents who are increasing investment in the risk function has
fallen slightly across IT, data, training and recruitment.
David Rogers, SAS global product
marketing manager for risk, says: “To take its necessary place at
the executive and board level, risk management must evolve from a
technical support function to a strategic process.
“This requires an assimilated and
comprehensive risk culture, top-down, supported by a truly
integrated risk framework that provides both a holistic and
specialised view of risk for each business level.
“Some of the new players in the
banking sector have a potential advantage in the market to
establish a good understanding of their business from an analytical
perspective, both in terms of strategy and operations.
“Established players, by contrast,
have been departmentalised or have created Chinese walls between
departments.
“They tend to have major structural
issues such as firewalls growing up between their various
operational businesses.”
Rogers says that banks’ ability to
match risk is a function of policy methodology and infrastructure.
Any one of these could break down as soon as you put in a new
product or line of business.
The most likely break down would be
in terms of infrastructure.
Rogers says the collapse of HBOS
was a good illustration, in particular the failure to integrate the
Bank of Scotland branded commercial lending banking arm of the
group with the rest of the bank.
Bill Hayward, director of
regulatory risk and group risk at Barclays, says: “There is a lot
more targeted risk management. The bank is now focused on
identifying which of the markets where it is makes sense to
grow.
“But it is important to stress
banks are open for business… the green shoots of recovery, if you
will.
“On complexity, we see that it is
not so much a case of complexity in the product offerings, but more
in the system in which the bank is having to operate.
“We are seeing a much more complex
set of regulations and also experiencing much more market
harmonisation and a greater drive to transparency.
“The whole regulation mindset is
changing, there is a joining up of the different risk types such as
credit risk, operational risk and market risk”
Ivan Carette, general manager at
BNP Paribas Fortis, tells RBI: “From a bank board
perspective, we see things are becoming more formalised. More
attention is being paid by the board to the [level of] appetite to
risk and risk tolerance we will accept.
“New activities are only taken on
board after very close interaction with the different parties
within the bank that will be impacted, be it new sourcing models,
new products or outsourcing.
“Analysis of data is becoming
increasingly important for the bank to make a decision about its
risk exposure.
“More and more, we are seeing the
involvement of the management at different layers of the bank
coming together with dedicated sessions on risk to ensure that the
bank’s risk strategy is consistent.
“Constructing is perhaps a better
fourth C than confidence. Looking ahead, I am convinced we are not
entering a period of complacency.”
Hayward adds another three Cs to
the equation: change, challenges and capital.
“I see challenges and change. I do
not see complacency at all. We are in a period of change and that
is driven by external factors including the market, politicians,
regulators and the public in general.
“There are also internal factors at
play, such as trying to get returns back to reasonable
levels.Another C – capital – cannot be ignored as we now see
lenders are much more robust and more solid than pre-crisis
levels.”
Chris Swecker, former executive
assistant director at the FBI and, until 2009, global security
director at Bank of America, is less optimistic as regards the risk
culture, at least in the US.
Swecker speaks from the experience
of 30 years in law enforcement, national security, legal, corporate
security and risk management positions, including 24 years with the
FBI where he was responsible for cyber-crime, international
operations, crisis management, operational technology and law
enforcement.
At Bank of America, Swecker led
investigations, physical security and international security and
executed a comprehensive transformation of all aspects of the
security organisation.
Swecker tells RBI that he
had a “great front seat during” the crisis serving with Bank of
America from 2007 to 2009 having left the FBI in 2006″.
He says: “I stumbled into this
role. There was a period when it appeared that the big banks were
taking security seriously. They were hiring people like me and
there were some great opportunities after 9/11 for people with my
background.
“In retail banking, crime hits the
hardest. In the C-suites, there remains a lack of understanding
about what crime does to the customer, what fraud does to the
bank’s reputation.
“Banks are very discreet about
fraud losses. They do not like to see fraud cases prosecuted-that
is my take on it.”
Swecker says that until criminal
activity takes place on a major scale, the banks fail to take crime
seriously, using Chip and PIN as a good example.
“The banks sell their customers
short. It takes two extra seconds for Chip and PIN.
“I have had my own card compromised
twice. The monetary losses are manageable, so the banks just pass
on the cost to the customer.
“As a consumer who has been
defrauded, it is the worst customer experience you can present.The
banks have to understand their own domain. Lenders represent a huge
patchwork quilt, especially due to mergers and acquisition
activity.
“There are some very savvy
criminals out there with a good network of mules and here comes the
internet and online banking. There is a lack of cooperation among
the banks… they do not want to discuss it.”
Swecker is dismayed that regulators
in the US fell down on the job during the mortgage crisis, their
major focus being on anti-money laundering (AML).
“AML has been the focus, flight
capital another priority, but there has been very little focus on
fraud. But consumers are speaking about it. When I speak at
conferences, two-thirds of hands go up when I ask who has been
defrauded.
“Banks hand out customers the keys
to the online car but do not do enough to protect your once you get
into that high crime neighbourhood. Nothing that touches the
internet is secure – end of story.”
While Swecker acknowledges that
banks are offering virus protection software, albeit for a fee, he
says that in itself was not enough, without effective programmes to
promote online security awareness.
“Not all US banks have got their
priorities wrong here. Chase flirted with promoting security for a
while and ran some good ads and USAA have been a great example.
“The USAA CEO has devoted his
monthly letter to customers this month to promoting online
security. USAA are a best practice model.”
Swecker does however bank online,
but is ultra-cautious, only using the online channel from one
computer and never when traveling.
“Most banks fail to acknowledge
there is risk. The US government loves to appoint Tsars. There is
false hustle. I wonder what they are doing.
“Homeland Security vies for
supremacy with the NSA and meantime, folks in China sit back
laughing.
“Local law enforcement cannot
handle credit card fraud. The mindset of the banks is the most
crucial aspect because the medium-sized and largest US banks are
dysfunctionally siloed.
“That goes for risk and product
management. Most banks still cannot even manage to achieve a single
view of the customer. I might have a credit card and current
account and those two components do not know it.
“Too many senior bankers are not willing to break down those
siloes. If you can get the right executive level management,
rationalise the technology and put your data where people can see
it, use powerful analytical firepower to work, you get it
right.”
Business intelligence spending rises
11.4%
Annual revenue for the business
intelligence (BI) tools market – comprising end-user query,
reporting and analysis and advanced analytics – reached $8.9bn in
2010 in software licence and maintenance revenue, up 11.4%
year-on-year.
The market remains dominated by
five vendors: SAP, IBM, SAS, Oracle and Microsoft, accounting for
64.9% of the total market, according to the consultants IDC.
Advanced analytics account for
18.7% of total business intelligence spending in 2010, down from
19.4% and 19.1% in 2008 and 2009 respectively.
The top five vendors in advanced
analytics by revenue remain SAS, IBM, Microsoft, FICO and TIBCO,
with SAS (35.2% market share) and IBM (16.2%) accounting for more
than one-half of the market.
Looking ahead, IDC’s end-user
surveys continue to point to healthy demand for BI software in the
foreseeable future.
The influence of cloud computing will continue to grow as
speciality cloud vendors have gained traction in the market based
on the message of simplicity to purchase, deploy, use and
maintain.
