PwC: Quantifiable Risks Threaten Financial Cos

The survey identified four reasons why risk management remains primarily focused on meeting regulatory requirements and has protecting and enhancing the value of the franchise as a lesser priority:

? A culture of risk awareness has yet to emerge.

? Compliance is not being turned into competitive advantage.

? The importance of governance is underestimated.

? Quantifiable risks are still the focus of too much attention.

Shyam Venkat, PwC partner, said in a statement that financial institutions have made significant strides since PwC's last risk management survey two years ago, "but our latest findings have revealed that too many organizations are still concentrating on calculating market and credit risk to a further order of accuracy and too few on understanding the totality of the risks they face in order to give themselves a competitive advantage."

He noted that in an environment where new and potentially lethal risks can suddenly emerge, institutions need to look at the bigger picture and "anticipate and avoid the submerged risks that can abruptly sink an enterprise and have both the crisis management processes in place and the underlying standards of behavior that are likely to soften the impact of such risks when they do come to pass."

The study labeled, "Uncertainty tamed? The evolution of risk management in the financial services industry," also found that many central risk groups did not have much input into strategic decision-making.

When asked in which business processes their company had a structured approach to assessing risk, only 43 percent of respondents pointed to mergers and acquisitions, and only slightly more?44 percent?to forming alliances and partnerships. Just 17 percent pointed to the setting of compensation policies for directors and recruitment policies, PwC said.

While senior executives of financial institutions may appreciate the dangers of reputational risk to their market value, many respondents' confidence in their organizations' risk management capabilities dipped markedly in the less traditional areas of risk, PwC said.

Some 24 percent felt their institution was ineffective in dealing with reputational risk, and even more took the same view of sovereign and political risks. However, the fact that only 16 percent admitted to quantifying intangible risks may help to explain why many organizations felt they were less than effective in dealing with them.

Mr. Venkat continued that financial institutions are increasingly attuned to the dangers posed by less quantifiable risks but need to turn their good intentions into action.

Less quantifiable forms of risk can do as much, if not more damage to companies' reputations, shareholder value and the long-term sustainability of their business as the more straightforward types of risk, he said. "It is also just as important for financial institutions to protect themselves from potential liabilities and reputational harm stemming from their external relationships with customers, suppliers and partners," Mr. Venkat said.

Ten attributes that were identified by PWC two years ago to help companies create a world-class culture of risk management remain valid, PWC said:

? Pay equal attention to quantifiable and unquantifiable risks.

? Identify, report and quantify all possible risks.

? Let an awareness of risk pervade the enterprise.

? Make risk management everyone's responsibility.

? Avoid products and businesses the enterprise does not understand.

? Accept that uncertainty exists.

? Monitor your risk mangers.

? Remember, good risk management delivers value.

? Define and enshrine your company's risk culture.