Chief financial officers, chief risk officers and compliance officers around the world are in agreement that risk management costs will continue to escalate over the next 18 months and beyond, with some predicting “exponential” increases as regulatory requirements tighten.
Ernst & Young’s 2010 survey on risk governance, "Recover, Adapt, Advance: Back to Business in an Uncertain World," reveals that 80% of banking executives polled are bracing for significant increase in costs to manage heightened regulatory requirements and strengthen risk governance across their business.
The survey this year uncovered a tone of caution among the executives who remain concerned about the recession’s depth and pace of recovery. "There seems to be unanimous sentiment that the uncertain market environment is making business planning and decision making — both short and long term — extremely difficult,” says Hank Prybylski, Ernst & Young’s Global Financial Services Risk Management leader.
The overwhelming issue facing banking executives — cited by 72% of respondents — is regulatory uncertainty. New regulations, designed at high level by the G20, International Monetary Fund and European level and being set at national level by local regulators, are expected to impose restrictions on capital, liquidity, risk management and compensation practices. However, for some countries it remains to be seen just how strict they will be and how soon they will take effect.
Respondents are already busy responding to pending regulatory requirements, particularly the potential restrictions on capital. They report a variety of initiatives — raising capital levels and ratios, rebalancing portfolios and reassessing market strategies — to prepare for the anticipated changes.
If the financial crisis is to have a silver lining for banks, then it is that many executives believe that the industry’s heightened focus on risk governance is one of the most positive outcomes of the crisis. Respondents unanimously agreed that risk governance must remain a top priority on senior management agendas: almost four in ten (38%) of interviewees said that their organisations are working diligently to upgrade their risk governance policies and procedures with the goal of instilling a risk awareness culture throughout the organisation.
In an effort to build a more comprehensive, consistent and collaborative approach to risk, boards and senior teams are starting at the top by defining, articulating and enforcing an organizational risk appetite and working to cascade it throughout the business.
“The flipside is that these efforts come at a cost. Our research shows that as the markets stabilize, executives are bracing for steep cost increases as they boost the time and systems dedicated to dealing with the aftermath of the crisis and the new regulatory frontier. While centralized costs of risk management are well known, our survey shows that enterprise-wide costs are more difficult to quantify," notes Prybylski.