Better Enterprise Risk Management May Prevent Future Crisis

The Economists Intelligence Unit’s study of ERM in the financial services industry resulted in several conclusions applicable multi-nationally. Mainly, senior leadership recognizes the importance of firm-wide risk management and a need to improve their ERM systems to successfully meet business objectives, especially mitigating crises such as the recent credit upheaval. 

Appetite for ERM

Results show the importance of a holistic risk approach is accepted world-wide.  91% of respondents had implemented or plan to implement an ERM system.  There were slight regional differences; those firms under greater regulatory pressure were at more advanced stages of implementation.  Regulatory pressure was listed as a key driver to implementation by a majority of those surveyed.  Another major driver was experiencing a credit crisis.  Firms acknowledged reassessing and providing a larger investment in ERM in the wake of a credit crisis. 

Most companies still utilize a silo-based approach in their risk management, but many have plans to move towards an entity-wide process.  Executives emphasized the need for a structure to manage top-level risks.

Respondents also cited lack of an effective ERM as the cause to credit problems.  This focus on ERM as a cause-effect relationship to crisis is supported by Ben Bernanke’s (Chairman of the US Federal Reserve) recent remarks on the importance of ERM, Basel II recommendations, and Financial Stability Forum and Institute for International Finance 2008 report.

Benefits of ERM

The most important benefits of an effective ERM system cited are protection against loss and damage to reputation.  It is vital that clients have trust in their financial institution to ensure future access to capital.  Firms sought to enhance existing ERM practices and are contemplating new tools and policies to upgrade their ERM strategy.  An example is the scorecard approach some rating agencies are adopting. 

Traditional stress-testing has come under scrutiny as it failed to predict and prevent current crisis.  Executives believe stress-testing methods must be modified to provide accurate data.  Testing the reaction to a market-wide scenario is one suggested upgrade.

Meeting the Data Challenge

Creating a culture for risk management is the key to implementing a successful ERM system.  Senior executives are most convinced by compelling evidence.  The survey found timeliness and quality of data as a major challenge to implementing ERM.  This is proved especially difficult after a merger. A sophisticated infrastructure is required for large organizations to gather and process data.  Systems are either not comprehensive, or merged systems don’t work together.

Once the data is collected, a significant impact is made by human judgment and use of the information.  The data users must have the qualifications and cultural support to effectively apply results.

Conclusion

The study explored financial institution’s view on enterprise-wide risk management.  The credit crisis exposed weaknesses in companies’ ERM processes, as financial institutions looked to the market to absorb the crisis.  The recent exposure and regulatory pressures are causing executives to take a more personal investment in effective ERM systems. 

The Survey

An appendix lists the questions asked and the responses by percentages.  There are general metrics of the types of firms who participated.

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Citation: Economist Intelligence Unit. “The Bigger Picture, Enterprise Risk Management in Financial Services Organizations” SaS. Sept. 1, 2008.