Turmoil in the financial markets has completely transformed the risk landscape, according to a survey by the Centre for the Study of Financial Innovation. The poll of banking risk, based on the views of nearly 300 senior financiers from 38 countries, is dominated by concerns about market conditions, notably the liquidity shortage and the crunch in the credit and derivative markets. Fear that this will lead to a global recession is high. The crisis has exposed a failure of controls within banks due to factors such as growing complexity of finance, distorted incentive structures and insufficient regard to risk management, according to the survey.
Top risks facing banks (last year in brackets):
1. Liquidity (-)2. Credit risk (2)3. Credit spreads (-)4. Derivatives (3)5. Macroeconomic trends (14)6. Risk management techniques (10)7. Equities (12)8. Too much regulation (1)9. Interest rates (5)10. Hedge funds (7)11. Fraud (11)12. Commodities (4)13. Currencies (13)14. Rogue traders (27)15. High dependence on technology (6)16. Corporate governance (8)17. Management incentives (26)18. Emerging markets (9)19. Back office (24)20. Retail sales practices (22)
DELOITTE REPORT: COST OF FINANCIAL SERVICES REGULATION
The world’s leading 100 financial institutions have seen their expenditure on regulation and compliance rise by more than 30% in the past three years to an estimated $56bn in 2007, according to a Deloitte report, and the cost of regulation could rise further and hit $100bn by 2010. This is even before the cost of any new regulation introduced in response to the current credit crisis.
Report author Chris Gentle notes: “It appears that a prime feature of the recent losses incurred by major banks in the credit crunch was the inability, in many instances, to link risk and control factors together. Financial institutions are always seeking to find and sustain the correct balance between risk and reward, but this lack of triangulation between control, risk and governance is, in most cases, a missing link which needs joining up. Governance and control systems need to be right at the top of the corporate agenda as they are likely to play a central role in the individual success or failure of senior executives.”
The report recommends that institutions consider compliance and competitive advantage in the same sentence. The challenge for financial services institutions is to develop the agility and flexibility to absorb new regulatory demands while accruing cost efficiencies and competitive advantages.
