Banks have made dramatic shifts in their attention to risk culture, but much more work remains to be done. A large extent of the industry is focused on risk culture, with more than eight in 10 (84%) global systemically important banks (GSIBs) actively changing their culture, according to EY’s annual risk management survey of major financial institutions.
In Asia-Pacific, 80% say they are strengthening accountability regarding risk roles and responsibilities, 80% are enhancing communication and training regarding risk values and expectations and 70% are reinforcing accountability regarding risk management.
Judy Vas, APAC financial services regulatory leader, EY says: “What we are seeing in Asia is increasing interest from the boards in establishing a sound risk culture in the past few years. Each bank is in a different stage of the journey, with some being more advanced than the others. Before the financial crisis, very few banks looked at risk culture and management holistically and many tended to rely on the support side, such as compliance and other risks department, to drive risk management initiatives. But that has changed dramatically, driven by a strong regulatory agenda, including the Asian regulators, like the Hong Kong Securities and Futures Commission which has been directly addressing the C-suite level of banks that they are responsible for compliance and good behavioral outcome.”
Half of GSIBs report operational losses of more than US$500 million in the past five years, with respondents indicating that these losses are driven by a combination of conduct fines (47%), operational failures (24%), and the costs of remediation (12%). An overwhelming 93% of GSIBs agree that weak oversight and controls led to these failures.
Risk governance structures being strengthened
Since the financial crisis, there has been an ongoing effort to strengthen risk governance. But the heightened focus on culture and conduct is driving further changes in risk governance structures as banks seek to tighten controls. A number of banks are establishing very senior-level or board-level committees to oversee conduct and ethics.
Nearly three-quarters (72%) of banks are strengthening risk roles and responsibilities and 68% indicate they are working to reinforce accountability regarding risk management. Many banks have also increased the involvement of the chief risk officer (CRO) and risk function in conduct issues.
More than half of banks (56%) say that achieving a balance between a sales-driven front-office culture and a risk culture is the key challenge to strengthening culture. This is leading banks to create programs to enhance accountability in the front office. Banks are working to ensure that the front office owns the risks and feels responsible for the entire process, which requires changes to culture, systems and structures. In Asia-Pacific, 78% reported using increasing oversight from group risk and 67% strengthening business line compliance functions to enhance conduct controls.
“Many of the banks in Asia are finding it difficult to implement because of many factors, including legacy data and systems and are trying to strike a balance between a sales culture and a risk culture. The fragmentation of regulations with the multiple local markets in Asia has also added to this challenge,” Vas adds.
More than eight in 10 (82%) banks have reduced target ROE since before the crisis and more than half have reduced it further since last year. Unfortunately for them, almost three quarters (72%) say that investors are not accepting these lower ROEs.
Banks continue to struggle to embed risk appetite
More than half (52%) of banks across the world agree that embedding risk appetite is important for changing the risk culture. But, despite an enhanced focus on risk appetite over the past several years, fully embedding risk appetite throughout the enterprise remains a challenge for many banks. In Asia-Pacific, 53% 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.
“This is critical because if banks are unable to embed risk appetite, it will hamper the changes being made to risk culture. But strengthening risk culture is also essential to make the risk appetite effective. The two go hand in hand.”
Regulatory changes, in particular those related to Basel lll, are placing increased pressure on traditional business models. Nearly two-thirds (65%) of banks agree that the combined liquidity and capital changes under Basel lll will have a significant impact on the cost of doing business, and more than half are targeting lower ROEs.
In Asia-Pacific, all respondents are evaluating their portfolios in response to capital requirement changes under Basel III however only one-third are considering existing business lines.
More than four in 10 (43%) banks are exiting entire lines of business that are no longer sufficiently profitable, and 12% are exiting geographies and retreating back to core markets.
David Schraa, regulatory counsel at the Institute of International Finance (IIF), says: “To some extent, these changes are attributable to capital and liquidity costs; in certain specific areas, such as correspondent banking, “de-risking” because of increased compliance cost and enforcement risk is driving the decisions.”
And, with 82% of GSIBs reporting they are still evaluating portfolios, these changes will continue. More than half (52%) of banks indicate they are considering increasing pricing for customer loans.
The report is the fifth in a series of surveys carried out by EY in cooperation with the IIF which surveyed 53 institute members across 27 countries to look at changes in risk management since the release of the IIF recommendations on improving risk culture, risk aggregation and risk management after the financial crisis.
