Deloitte Finds Evidence ERM Lacking In Major Firms

NU Online News Service, June 8, 1:40 p.m. EDT

A global survey of 111 financial institutions including insurers has found only 36 percent have an enterprise risk management (ERM) program, the Deloitte consulting firm said.

The firm said banks and other financial institutions' risk management efforts need work when it comes to integrating risk responsibilities into compensation goals, establishing integrated risk management processes and systems, and improving model validation.

Deloitte said among the "most surprising" findings from the survey is that 49 percent of the responding firms have incorporated risk-management responsibilities, either in whole or in part, into the performance goals and compensation decisions for senior management.

It found while only 36 percent of the institutions surveyed had an ERM program, another 23 percent were in the process of creating one.

Deloitte said that while ERM programs provide an integrated, comprehensive assessment of all the risks that an institution is exposed to, and an objective and consistent approach to managing them, only 58 percent among institutions with $100 billion or more in assets had an ERM program in place.

The firm noted that regulators have been encouraging financial institutions to independently validate their risk-related models to ensure they can reliably assess the likelihood and magnitude of potential risks.

However, according to the survey, action to date in response has been mixed. Fifty-three percent of the participating institutions indicated they had an independent model validation function, but over two-thirds of the remaining respondents reported having no plans to create such a function.

Deloitte said senior executives may require more comprehensive metrics and tools to adequately asses all the risks inherent in the range of complex products.

The survey found nearly 80 percent of the institutions polled employed stress tests for their banking and trading books, although 58 percent reported performing stress tests of their structured product exposures.

Among institutions that conducted stress tests of their structured product exposures, only 17 percent conducted them daily, while two-thirds conducted these tests quarterly or less often, said Deloitte.

The survey also found that institutions may also have significant work to do to upgrade their information technology risk management infrastructure.

According to Deloitte's poll, roughly half of the executives were extremely or very satisfied with the capabilities of their risk systems to provide the information needed to manage market and credit risk but in other areas, such as liquidity risk and operational risk, only 40 percent or fewer provided ratings this high.

Edward Hida, the editor of the report and a partner with Deloitte & Touche LLP's Banking & Securities team said, "The past two years have demonstrated the need for enhanced risk management capabilities at financial institutions, and the challenging times that undoubtedly lie ahead make it an even greater priority."

Mr. Hida who is also the global leader of Deloitte Touche Tohmatsu's Risk and Capital Management practice said, "Risk and return are generally correlated and should be evaluated together. One of the biggest areas in need of review is how to infuse risk management into performance objectives and business decisions."

Deloitte said its sixth edition of the report -- "Risk Management in the Spotlight" -- surveyed chief risk officers or equivalent senior risk officers from 111 financial institutions, with combined total assets of more than $19 trillion. Also included in the survey were insurers and asset managers.