Business benefits as important as compliance goals for financial services industry
CARY, NC (July 05, 2006) – Reaping business benefits now matches regulatory compliance as the key driver of enterprise risk management (ERM) systems according to a global survey of 339 financial services executives. These benefits include improved performance management, better risk-based pricing, and reduced capital allocation and credit loss. The results of the research study conducted by SAS, the leader in business intelligence, were unveiled today at the Ri$k Capital 2006 conference in Paris.
A full 83 percent of participating financial institutions view ERM as a strategic priority, per the survey. Many are setting up new ERM or “integrated compliance” programs. The survey also found that credit risk management is still the top risk management expenditure priority for most firms. In addition, 78 percent of respondents view credit risk management as critical and anticipate significant, quantifiable economic rewards over the next 24 months, including a 10 percent reduction in economic capital and a 14 percent reduction in cost-of-credit losses.
To illustrate the impact of these findings, researchers applied these projected cost savings to a large financial institution with a regulatory capital allocation of $10 billion, of which $6 billion is allocated for credit risk. Based on the average survey result, the bank applying an advanced, systematic ERM program, would reduce its capital allocation by $600 million. Applying a standard 10 percent cost of capital rate, this means that the implementation of the ERM program could give the bank a net benefit of $60 million over 12 months. Furthermore, if the credit risk cost saving is applied to the same institution, one that has stated a $1 billion annual credit risk loss in its recent annual report, then it is reasonable to assume that this bank could save approximately $140 million per annum through improved credit risk management. The combined savings from these two efforts results in a total of $200 million in annual savings for this institution.
Data quality and data management continue to be the biggest obstacles to the successful implementation of an ERM system, according to respondents. Even though discussions about risk management have evolved and matured over the past two years, these data obstacles continue to plague risk management implementations.
“These findings reiterate the significant role of data management and the need for organizations to focus on overcoming the data implementation issue,” said Peyman Mestchian, SAS’ Director of Risk Management in EMEA. “To deliver an enterprise view of risk that meets all stakeholders’ requirements, institutions have to start with what they have in common: information. That means lifting data out of the organizational and technological silos, cleaning it up, and integrating it into financial and customer decisions to enhance business value and manage companywide risk.”
Financial institutions like Belgium-based AXA Bank agree on the need for powerful data analysis when handling enterprise risk management. “We wanted to make these necessary investments as profitable as possible by also generating information more rapidly to benefit the customer and the business,” said Philippe Colpin, Manager of Basel II and IAS/IFRS Credit Retail Issues at AXA Bank. “Hence the need for an efficient data analysis tool to help us turn Basel II constraints into opportunities.”
The survey responses indicate that, for long-term strategic benefits, firms need to rely on software that delivers consistent and transparent data governance. Focusing on regulatory timetables may obstruct progress toward more forward-looking ERM. This survey demonstrates that during the next few years, financial institutions will be looking to get value from their investment in compliance processes and systems. Firms are aiming to have a more integrated and systematic approach to ERM leading to risk-based performance management.
“The business case for ERM withstands the ‘cost-benefit’ test only if an organization can implement a fully integrated risk intelligence platform, drawing from existing data sources and working with complex and heterogeneous IT environments,” explained Mestchian. “The platform needs to cover the full spectrum of risks, bringing them together under a single governance umbrella.”