2.24 PM Thursday, 18 April 2024
  • City Fajr Shuruq Duhr Asr Magrib Isha
  • Dubai 04:33 05:50 12:21 15:48 18:46 20:03
18 April 2024

Risk management plays a vital role in credit crisis

By Karen Remo-Listana

A lack of discipline in risk management was the main contributory factor in the credit crisis and risk managers are still reluctant to tackle incentive and compensation issues, banks participating in a recent global survey said.

And despite the acknowledgement, the study has found that the risk function is still struggling to gain influence.

According to the survey, "Never again? Risk management in banking beyond the credit crisis" seven out of 10 respondents feel risk departments are having a greater influence within banks, particularly at a strategic level. However, their involvement in more day-to-day business decisions may be restricted by poor communication with the lines of business.

More worryingly, a vast majority [76 per cent] of those involved in managing risk still feel despite raising its profile, risk is stigmatised as a support function. Banks are also not addressing the lack of risk expertise at senior levels, the survey has found. Under half [45 per cent] of the banks in the survey acknowledge their boards are short of risk knowledge and experience – a lower figure than may have been expected.

It is of some concern that many are not even planning to address this issue – particularly at the non-executive level where the need for expertise is most acute.

"With a quarter of respondents seeing no need for a risk committee, many organisations could be lacking a rigorous, independent challenge to the judgments made in businesses," said the report sent exclusively to Emirates Business.

The survey reveals a vast majority of those responsible for managing risk [77 per cent] are dedicated to instilling a more robust risk culture in their organisations and feel greater "tone from the top", along with a more authoritative risk function, are two of the keys to such a transformation.

Some respondents expressed concern that regulators – rather than non- executive directors – are driving change. This further supports the perception that – in certain institutions – risk may still be seen as a peripheral "compliance" issue, rather than an essential part of strategy.

The survey shows that banking executives named an aggressive profit-based incentives and remuneration system [52 per cent], followed by lack of risk governance [50 per cent] and risk culture [48 per cent] as leading contributors leading up to the credit crisis.

However, majority of respondents are cautious about increasing the involvement of either the regulators or the risk function in setting policy.