Banks need work implementing risk management-report

LONDON, June 21 Thu Jun 21, 2012 6:23am EDT

LONDON, June 21 (Reuters) - Three quarters of banks and financial firms have not pushed improved risk management at senior levels down through their businesses, according to an industry report.

"While many (companies) have been successful establishing a risk appetite at the enterprise level, many are struggling to effectively cascade the risk appetite through the operational levels of the organization and embed it into decision-making," said the report by Ernst & Young and the Institute of International Finance (IIF), released on Thursday.

It said the structure of risk management had undergone significant change since the 2008/09 financial crisis, but most firms were struggling to make all the company aware of risk appetite, or the amount and type of risk a bank is able and willing to take in pursuit of profits.

Only 26 percent of firms surveyed showed they had made good progress embedding their risk appetite into the businesses, and only 37 percent said their risk management changes had linked into their "day-to-day" decision making.

The financial crisis has shown significant failures in management, supervision and regulation of risks, and a $2 billion trading loss unveiled last month at U.S. bank J.P.Morgan , which had been regarded as one of the best risk managers, shocked investors and rekindled concern about how far management are on top of complex trading positions.

Firms were conducting more internal "stress testing" as part of their risk management, and three-quarters of those surveyed said they had implemented new processes in the past year.

"The proper risk culture, understanding the right balance of risk appetite, and the right balance of risk/reward, are essential to mitigating future crises, without which, no amount of capital or prospective rules will hold us safe," said Rick Waugh, a vice-chairman of the IIF and CEO of Canada's Scotiabank .

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