A report conducted by the Economist Intelligence Unit and released this week by SAS, the big business analytics software firm, warns that financial institutions, particularly in the U.S., are “feeling too comfortable” about their risk management systems and suggests they may be unprepared for the next crisis.
The study, which was based upon a survey of 315 financial services executives at banks, capital markets firms and insurers ranging in size from $100 million to $1 trillion in assets, found that as these companies have moved away from a focus on risk management, in favor of growth and profitability, corporate “risk cultures” are becoming “ill-prepared for current demands.”
David Rogers, the software firm's global product marketing manager for risk, said these companies are going to have to “re-think their risk management practice,” and probably significantly invest in this area in the wake of new regulations derived from the Dodd-Frank Wall Street Reform Act.
This is especially true now that all the major credit rating agencies are taking a much closer look at these U.S.-based global banks and both the Federal Reserve and U.S. Treasury are indicating they'll be less inclined to prop up these so-called "too big to fail" institutions.
The study found European banks were farther along than their U.S. counterparts in addressing risk issues and in establishing risk management practices and systems in their operations.
For example, while 77% of European executives of financial institutions questioned in the survey said that their institutions had a “clearly defined risk management strategy that is updated on a regular basis,” only 54% of executives at U.S. financial institutions made the same claim.
Where 16% of European financial institutions were said to have a clearly defined strategy that was not updated regularly, 28% of US financial institutions they had failed to update their procedures on a regular basis. Only 2% of European institutions said they had no risk management strategy while 10% of U.S. firms acknowledged this shortcoming.
The survey suggests that differences in regulatory oversight likely account for the different. European banks have been quicker than American banks to comply with Basel II reforms, while in the U.S., financial institutions have been lobbying strenuously to weaken and delay the drawing up of new regulations to comply with the Dodd-Frank reform legislation passed by Congress.