As the financial crisis spreads and threatens the world economy, the importance of risk management has never been greater. Indeed, given the fact the crisis was not caused by any single type of risk but a mix of market risk, credit risk, operational risk and others, the urgency for banks to move to a holistic risk management approach cannot be overstated.

“The integrated approach towards risk management has been a hot topic for the past 12 months and recent cases just highlight again the importance,” says a Singapore-based senior risk manager, who says the bank has started relevant initiatives alongside its Basel II project. However, moving towards such an approach is not an easy task, “as different risk types have traditionally been assessed, measured and managed independently using different approaches and methodologies”, he says.

“Everyone is thinking about this,” says Chris Matten, partner, financial services industry practices, PricewaterhouseCoopers (PwC).  “This whole idea is, what is the right way to organise yourselves so as to get a truly holistic view of risk?”  Although different banks may have different structures, there are a few commonalities emerging in banks following best practices in risk management, observes Matten.  

Firstly, “the CRO will be on par with the CFO in terms of the hierarchy compositions” and the two will become “equal members of the senior management committee reporting jointly to the CEO”. The second element is that the risk department will be monitoring all of the risks of the organisation. “Everything will be in one place. It has to be. Everybody’s learnt that lesson,” he says.  Thirdly, there will be very clear segregation between the origination of risk and the monitoring and supervision of that risk. The risk management function will be responsible for any decisions around hedging or selling of risk, answering questions such as: “Is it a good thing to do? What’s the impact of doing it? But the origination or the execution of that idea will be done somewhere else, either in the business unit or in finance”, according to Matten.

Some banks rely on various metrics to have a broad view of risk factors. This may be one of the reasons that Bank of the Philippine Islands has dodged most of the recent market turmoil. “We are one of the few banks with very heavy investment in automated Basel II software and what we do is we use it more to help guide us in our management decisions. We have excellent metrics. When something like this happens we’re able to get a look at all of the parts of the risk, all of the risk factors in less than a day so we know where to look and get this information fairly quickly,” says Aurelio Montinola III, president of Bank of the Philippine Islands.

PwC’s Matten says over the next 24 months we could see a total reconfiguration of the way banks handle risk. He adds: “We’ll end up with a pure risk management function, which is not ‘management’ but risk monitoring, supervision and policy that will cover all risks, whether market, credit, interest rate risks, liquidity or operational, whatever it happens to be, because you can’t split these things in the modern world. And so this is, if you like, the steady state that we need to get to.” – By Wang Yi

Source: The Asian Banker Published September 24, 2008

BIIA Newsletter September 2008 Issue