Develop and execute a roadmap to meet rising regulatory and stakeholder expectations. Banks of all sizes are required to build sophisticated analytical risk management capabilities in compliance with Dodd-Frank and other legislation making a priority of optimizing the deployment of capital and infusing objectivity into its allocation.
Taking the road to advanced approaches and heightened standards in risk management
1. Taking the road to advanced
approaches and heightened
standards in risk management
Evolution of higher standards
Over the past three decades, as information systems
and databases have developed and matured, there has
been an ever increasing expectation among regulators,
investors, rating agencies and other stakeholders that
risk management analytics advance as well. This trend
has only accelerated since the 2008 economic crisis.
Although the most exacting requirements apply to the
largest banks, institutions of all sizes are required to
build new analytical risk management capabilities of
unprecedented sophistication. These requirements align
with the goals of the risk management function to help
drive improved enterprise value.
Grant Thornton’s professionals can work with you to develop and execute a
roadmap to meet rising regulatory and stakeholder expectations.
References
[1] Office of the Comptroller of the Currency. “OCC Finalizes Its Heightened Standards for Large Financial Institutions,” September 2, 2014.
[2] Financial Accounting Standards Board. “Financial Instruments- Credit Losses (Subtopics 825-15),” December 20, 2012.
2. Taking the road to advanced approaches and heightened standards in risk management
Advanced practices requirements
Recent years have seen a dramatic increase in the
sensitivity of capital, risk management and loan
accounting requirements to measures of risk. Dodd-
Frank Act Stress Testing (DFAST) has made enterprise
-wide stress testing, an intrinsically quantitative exercise,
mandatory for banks with over $10 billion in assets.
Comprehensive Capital Analysis and Review (CCAR)
has made an even more quantitative version mandatory
for banks with over $50 billion in assets. Basel III
introduced a more risk-sensitive treatment of various
exposure categories in the standardized approach, and
required more robust and accurate internal models for
credit, market and operational risk in the advanced
approaches, generally applicable to banks with over
$250 billion in assets. Guidelines establishing
heightened standards from the Office of the
Comptroller of the Currency required that banks with
over $50 billion in assets incorporate quantitative limits
and stress-testing processes into risk appetite exercises.
The current expected credit loss (CECL) model from
the FASB requires a forecast of future expected losses
in calculating the allowance for loan and lease losses
(ALLL) rather than just recognizing already
incurred losses.
Keys to success with advanced practices
In order to comply with new requirements and
increase its value to the enterprise, the risk
management function needs to make a priority of
optimizing the deployment of capital and infusing
objectivity into its allocation.
Success begins with the recognition that it is in the
institution’s best interest to go well beyond checking
the box to satisfy specific regulatory obligations. In
order to work well, advanced approaches must be built
on a comprehensive and robust enterprise, credit,
market and operational risk program. They employ
increasingly advanced analytics and large quantities of
data. Favorable outcomes depend on recognizing that
an analysis or a model is simply a structured approach
to processing information. Data management and
systematic data exploitation are critical to facilitating the
speed, relevance and immediacy of risk management
processes. The availability of data from the compliance,
audit, finance, treasury, marketing and risk functions
enables a cross-functional integrated view of the
business and helps optimize decision-making. Tools
such as stress testing can be leveraged as opportunity
assessment tools — capable of producing insights and
risk and reward trade-offs.
How we can help
Grant Thornton LLP provides a full spectrum of
tailored services to assist financial institutions on the
road to greater risk management efficiency and value
added. We work closely with institutions to help
structure a risk management maturity assessment;
develop a target state roadmap; and manage the
planning, design and execution of an initiative to
enhance the function.
The Risk Center of Excellence within Financial Services
Advisory specializes in working with clients to identify,
remediate and resolve their risk management gaps so
they meet and/or exceed regulatory requirements, or
prepare for enhanced expectations.
Our risk management services
Grant Thornton offers insights and practical risk
management solutions tailored to all three lines of
defense (i.e., front line units, risk and compliance
functions, and internal audit). Our teams consist of
former financial services executives, regulators,
compliance officers and senior leaders who have served
in key risk management roles in financial services, and
bring experience working with institutions of all sizes.