Remaking risk management in banking: Key challenges and opportunities

Remaking risk management
in banking
30 July 2013

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Remaking risk management in banking

Today’s moderator
JB King
Ernst & Young LLP (US)
Director, Marketing - Global Banking and
Capital Markets
Join today’s Twitter discussion:
#EY_BankingRisk

Today’s agenda
► Assessing risk culture
► Linking business decisions to risk appetite
► Data and IT challenges investments
► Basel III driving business model changes
Join today’s Twitter discussion:
#EY_BankingRisk

Today’s presenters
Rick Waugh
Scotiabank
Chief Executive Officer
Patricia Jackson
Ernst & Young LLP (UK)
Leader of Financial Regulation Practice
Hank Prybylski
Financial Services Office Advisory Leader and
Leader of Financial Services Risk Management
The information contained herein is a summary in nature. Viewers should consult their own professional
advisors to address their individual circumstances and concerns.

Progress on risk management: fourth annual
study and report
► Study overview
► EY, on behalf of the Institute of International Finance (IIF)
► Assess progress in the implementation of risk governance
since 2008 crisis
► Participants:
► 74 firms
► 36 countries
► 50 interviews with CROs and senior risk executives
► 68 online survey responses

Progress on risk management: fourth annual
study and report (cont.)
► Themes
► Consistent culture cannot be assumed
► Organizational values to need to be clarified
► Tools like stress testing should be redeveloped and used
as management tools
► Continued investment in IT and data is essential
► Strategy should be rethought in light of new regulations
► Regulation, investor pressure and uncertain economic
environments cannot be underestimated
Survey available at: ey.com/banking

Opinion check
How important is it to have a single culture inside a
global bank?
A. Critical
B. Somewhat important
C. Not very important
D. Important but impossible to achieve
E. Other and does not apply (EY, faculty, alumni)

Progress in achieving a strong risk culture
0%
53%
44%
0%
10%
20%
30%
40%
50%
60%
We have a long
way to go
We are making
progress
We have achieved
a strong risk culture

Action taken to review and assess internal
risk culture
32%
7%
16%
45%
0% 10% 20% 30% 40% 50%
N/A
Cultural review by internal
audit
Cultural audits by third party
Review and discussion with
senior management led by
task force

Initiatives to strengthen risk culture
73%
71%
69%
56%
23%
16%
Strengthening risk roles
and responsibilities
Enhancing communication and training
regarding risk values and expectations
Reinforcing accountability regarding
risk management
Aligning compensation with risk-adjusted
performance metrics
Changing the composition of the board
and senior management team
Changing compensation to reflect
softer cultural issues

Progress in achieving a strong risk culture
► Firms severely impacted by the crisis vs. all firms
80%
70%
60%
50%
40%
30%
20%
10%
0%
68%
54%
43%
32%
We are making
progress
We have achieved
a strong risk culture
All
Severe impact

Opinion check
What is the biggest challenge your firm faces to risk
appetite development and implementation in your
organization?
A. Using the risk appetite framework for managing risk
B. Tracking and enforcing adherence to risk appetite
C. Linking risk appetite to business decisions
D. Expressing risk appetite for different risk types

Top five challenges to risk appetite
development and implementation
29%
37%
43%
46%
65%
Achieving sufficient clarity
Determining the right metrics
Using the risk appetite framework
for managing risk
Expressing risk appetite for
different risk types
Effectively embedding it into
operational process

Testing of individual business decisions
against risk appetite
54%
5%
41%
Not tested Largely testedSomewhat tested

Risk appetite linkage to the annual firm wide
business planning process
40%
2%
58%
No linkage Significant
linkage
Some linkage

Fact check
What is your firm doing to make stress testing
easier and faster?
A. Shifting to central testing models
B. Improving aggregation of data
C. Creating a central stress testing unit
D. Creating more integrated models

Data and systems a key challenge across a
range of topics
23%
38%
59%
Business taking
ownership of risk
Systems and data
Balance between
sales-driven front
office culture and
risk-focused
culture
Top three challenges
to strengthening risk
culture
34%
35%
49%
Shortage of
resources
Inadequate
systems
Difficulty in
extracting and
aggregating data
to improving risk
culture
54%
63%
71%
Multiple or
inconsistent
regulatory
requirements
Systems
architecture
Data
availability/data
quality
in implementing Basel
III

Change in IT spend over the last year
15%
22%
63%
0% 20% 40% 60% 80%
Decreased
Stayed the same
Increased

IT change under way
Improvement of liquidity data management
Support capital allocation compliance
Convergence/reconciliation of risk and finance data
Aggregation of group/firm data
Strengthen internal stress-testing processes
Capture of exposures across the group to single entities
Integration of firm-wide stress testing data
Capture and reporting on risks in VaR
Recovery and resolution planning

Fact check
Which of the following best expresses your investors’
tolerance for lower ROE (return on equity)?
A. Investors are pushing for increase in ROE
B. Low book to equity price is an impediment for capital-
raising
C. Investors demanding reduced costs including
compensation
D. Investors demanding business mix changes to
deleverage further

Impact of Basel III plus G-SIB* requirements
on common equity Tier 1 capital
30%
5%
0%
5%
13%
7%
Less than 30%
31 to 50%
51 to 70%
71 to 90%
91 to 100%
101 to 130%
Above 130%
40%
* Global systemically important banks

Percentage of the balance sheet (under the
LCR*) accounted for by liquid assets
47%
29%
20%
4%
10%-20%
Above 20%
5%-10%
2%-5%
0-2% 0%
* Liquidity coverage ratio

Effect of combined liquidity and capital
changes under Basel III on business model
62%
43%
29%
13%
Evaluating portfolios
Shifting out of complex
less liquid instruments
Exiting lines of business
Exiting geographies
None of the above
8%
81%
44%
44%
17%
17% 2012
2013

One-minute recap

Resources
► http://www.iif.com/regulatory/standards
► ey.com/banking
► Remaking Financial Services: Risk
Management Five Years After The Crisis
(full study)
► Remaking Financial Services: Risk
Management Five Years After The Crisis
(Executive summary)
► ey.com/financialreform
► Follow us on Twitter @EY_Banking

Contact us
Lawrence (Hank) Prybylski
Patricia Jackson
Ernst & Young LLP (UK)
JB King
+ 1 212 773 2823
lawrence.prybylski@ey.com
+44 20 7951 7564
pjackson@uk.ey.com
+ 1 203 674 3446
jb.king@ey.com
Follow us on Twitter: @EY_Webcasts

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Remaking risk management in banking: Key challenges and opportunities

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