Financial models developed in-house no longer provide the required level of transparency and independence needed to meet all stakeholder and regulatory requirements. This change requires banks to step away from their closed, black-box systems and move toward third-party solutions offered by vendors – especially those that include comprehensive documentation of the models and methodologies used. For example, in 2008, Standard & Poor's announced that it will review the quality of enterprise risk management as a new component in its reviews of credit ratings.Īn additional area of focus for banks is the need to provide transparency in the derivatives transactions and valuations that are being delivered. Rating agencies are increasingly focusing on the quality of a firm's enterprise risk management practices in their rating processes. The Institute of International Finance report stated that a firm's risk management approach should not rely on a single risk methodology, but instead take a comprehensive approach, integrating strands such as credit, market, operational, liquidity and reputational risks. A number of published papers point to the deficiencies of many financial institutions' risk management practices and the concrete actions that need to be taken. The recent distress in financial markets has placed greater emphasis on a financial institution's ability to demonstrate a comprehensive approach to viewing firmwide exposures and risk. Compliance aside, implementing effective risk policies that are designed to continuously manage a firm's risk-and-return profile and capital are required for the long-term success of a bank. The need for improved risk management is not only being driven by regulators, but by internal and external stakeholders: investors, boards of directors and, in some cases, governments. No longer is risk management the sole responsibility of the chief risk officer or a bank's risk department its responsibility now resides with vice presidents, associates, directors and managing directors across various business units.īanks have felt the pressure more than other financial institutions to improve their risk management practices to avoid a repeat of the credit crisis.
Risk management today is top of mind for banking professionals around the world, and it has begun to revolutionize the way banks operate. Building an Integrated Risk Infrastructure.
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