Regulatory changes across the globe – combined with other risks – are placing increased pressure on traditional business models, and Canadian banks are not immune, according to EY’s annual risk management survey of major financial institutions.
“Canadian banks have been at the forefront of an industry-wide effort to more effectively manage risk culture,” says Andre de Haan, EY’s Canadian Financial Services leader. “Still, shifting accountability for risk into the front-office and ensuring controls are in place and effective are ongoing challenges.”
EY’s report shows 56% of banks say achieving a balance between a sales-driven front-office culture and a risk culture is the key obstacle to strengthening culture.
“The front-office is under intense pressure to boost the bottom line,” says de Haan. “Traditionally, the front office has been focused on revenue targets and the risk responsibilities have been confined to not breaching limits.”
Many banks surveyed, however, believe the tools and clarity around accountabilities are not sufficient to make front office responsibility for risk real.
“Ensuring the front office owns the risks and feels responsible for the entire process requires changes to culture, systems and structures,” explains de Haan. “Especially with investors not willing to accept lower ROEs, striking a balance between a sales culture and a risk culture remains a challenge.”
According to the survey, 82% of banks around the world have been reducing target ROE since before the crisis and more than half have reduced it further since last year.
Other key findings:
- 72% of banks are strengthening risk roles and responsibilities and 68% indicate they are working to reinforce accountability regarding risk management
- 58% of banks report they are having difficulty moving firm-wide risk appetite into the businesses and 70% are still struggling to link business decisions to the risk appetite
- 58% of banks are aligning compensation with risk-adjusted performance metrics
“Coming out of the financial crisis, Canadian banks were an example of sound risk culture,” says de Haan. “But banks here can’t afford to rest on their laurels. Strengthening risk culture is an ongoing process, and essential to making overall risk appetite effective.”