Bank boards and management are increasing their focus on risk management, especially non-financial risk, as they address regulatory pressure, investor demands and the high cost of past misconduct, says an EY survey.
“Globally, regulatory pressure on banks has resulted in higher costs and decreased return on equity. As a result, investors are demanding that banks reduce their costs in order to increase returns,” says Simon Beaulieu, EY’s financial services risk management leader. “Canadian banks are facing a similar situation.”
According to EY’s survey, 69% of global systemically important banks reported losses from non-financial risks (including regulatory fines and penalties) of more than US$1 billion during the past three years. To reduce these costs, globally, banks are reinforcing accountability among front office staff.
“In Canada, we’re also seeing that banks are investing into more integrated information systems to manage risks and control costs,” notes Beaulieu.
Elements of a risk management model include:
Defined roles and responsibilities
Clearly articulating to all employees that bad behaviour will be penalized and enforcing the rules of risk management are two key elements of risk accountability in an organization. Eighty-five percent of banks report that a breach in risk conduct is immediately elevated to the risk department (an increase from 76% in 2014), while 69% report business-line or desk leaders handle a breach. Most banks report that severe breaches in risk policies result in disciplinary actions (94%).
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Proactively managing non-financial risks
Instead of waiting to conduct post-risk event reviews, 57% of banks are now developing more forward-looking risk assessments. Other proactive steps banks are taking include more detailed loss reporting and forensic investigations after an event has occurred (72%), conducting in-depth reviews of individual operational processes (70%) and evaluating near-miss events (64%).