If banks are going to ensure greater stability in future, they must take a longer term view on investment and put the management of risk at the heart of the business
The financial crisis and subsequent economic downturn have taught us much. Two things stand out; that banks must learn from past mistakes, and that maintaining the status quo is not an option. Regulatory demands for change, and broader market demands for change, provide the necessary mandate for investment in better data, better reporting and better risk management capabilities. What this amounts to is the expectation of vastly improved management of enterprise-wide risk; the need for appropriate information flows, from top to bottom, internally and externally.
The prize should be obvious to those accountable for the management of banks. Governments, regulators, depositors, borrowers, investors and employees all want the same thing – long-term, sustainable and growing profitability. These stakeholders – to varying degrees – expect financial stability, safety, continuity, reasonable and stable returns, manageable costs and continuing employment. Delivering improved enterprise risk management across the bank will ensure everyone is a winner.
But to achieve this goal, investment is needed. And investment is indeed being made, with huge sums being spent in response to evolving requirements, particularly from the regulators. The challenge is to ensure that the investment is prudent and fits with a wider strategy.
Herein lies the problem; too much of the money spent on “improved risk management” is made in silos, with a view to resolving an immediate requirement at minimal cost. As a result, the wider opportunity for change is overlooked. There are many reasons for this, not least because strategic investment takes longer and tends to cost more. It is the nature of the markets, of businesses, of individuals, to want to see results – quickly. So performance continues to be measured over the short term. Meanwhile, there are functions competing for resources in every bank, often pursuing similar but disconnected demands for organisational change. Consequently, the opportunity to introduce structural change is often lost, with the investment made being purely tactical.
This is compounded by the fact that memories are short, and unless the right motivation is there, necessary change is not embedded before old behaviours resurface. As Stefan Walter, secretary general of the Basel Committee for Banking Supervision observed at a meeting of the Financial Stability Institute in April 2011: “Despite the severity of the crisis, we are already seeing signs that its lessons are beginning to fade.”
The consequence is that long term strategic investment takes a back seat and many firms do not embed the sort of structural reforms they need. But there are some organisations doing it – and those who invest with strategic vision, to enable growth combined with organisational efficiencies, that is the delivery of ‘more for less’, will benefit and gain true competitive advantage.
At Moody’s Analytics, we see evidence of many of our clients adopting the strategic route, and they find many ways of making the investment pay. They accomplish this by overcoming silo structures and by looking at ways of leveraging their investment.
Their aim is to enable timely decision-making and risk anticipation across the enterprise. This is achieved through ensuring improved data integrity and quality, combined with better access to information, analytics and integrated reporting, at all levels. The end result is greater clarity for senior management, operational efficiencies and more productivity from individuals and teams, plus benefits for their own customers (for example, faster decision making). But these things take time and require vision.
Banks know they have to change. For management wanting to leave a lasting and valuable legacy, the solution is clear: invest in risk management as a core competence and put it at the heart of the business.
Charles Stewart is senior director at Moody’s Analytics, a global leader in risk measurement and management solutions