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(Last of
seven parts)
What
next?
To
conclude this 13th edition of Basel briefing, it is time
to look beyond Basel II towards the new risk-management
agenda that has emerged from the Basel II process. By
codifying some of the innovations in risk management of
the 1990s and early 2000s, Basel II has, as intended,
catalyzed these innovations and fast-forwarded the
banking industry onto a new development path.
 Of
course Basel II, and the associated changes in national
regulation, has not been the only driver of change; a
number of parallel developments have taken place,
including other regulation (IFRS, SOX, etc.), growth in
secondary credit markets, intensified competition and
consolidation in the industry, increasing scrutiny from
debt/equity markets, increasing complexity of the
businesses and the risks taken on by banks and, of
course, the current market crisis.
Together, these developments have driven very
significant advances in risk management. In a nutshell,
banks are now exposed much more directly to the
economics of their risks, be that through:
• The
availability (and volatility!) of market prices of risks
that previously had no market; or
• The
transparency of their external reporting and increased
stakeholder sophistication; or
• The
intensified competition arising from a much clearer
internal view of where (risk-adjusted) value is created,
as well as from an increasingly global and unprotected
market place.
A new
risk-management agenda, leading to a new model for risk
management
Given
this background, it is not surprising that the new
risk-management agenda represents a swing away from the
compliance focus that has dominated the last few years
and back towards a focus on performance.
At the
top of the house, banks are integrating the management
of risk, return and capital, getting risk, finance and
strategy to team up much more than would typically have
been achieved in the past. This is an imperative to
satisfy stakeholders’ scrutiny around the relationships
among risk, return and capital. For most risk functions,
this requires building “strategic” risk-management
capabilities and integrating these into the corporate
calendar.
At the
same time, banks are already developing their core
risk-management functions beyond Basel II standards
across a range of dimensions. These span everything,
from a broad reconfiguration of their organizational
model and infrastructure of risk management, to
advancing further their capabilities to manage different
categories of risk and their portfolio aggregation.
Finally,
banks are leveraging their advances (and investments) in
risk management into business applications. These
applications allow better informed decision-making
around risk taking, more efficient business processes
and closer alignment of targets and incentives to
(risk-adjusted) performance.
Approaches to transforming the risk-management function
Bringing
about this transformation of risk management represents
an effort arguably of the same order of magnitude as the
Basel II programs that were conducted during the last
years, though with a much smaller proportion of the
investments falling within the strict confines of the
risk function.
Banks
are pursuing different approaches to organizing this
effort. Some institutions are stepping back to take a
fresh look at their group-wide risk management,
systematically rethinking all elements of the risk
function, ranging from the function’s strategy and
objectives to risk data and IT systems.
Other
institutions are approaching the transformation of their
risk-management model by conceiving it as a change
program in risk culture, with an emphasis on driving the
Basel II developments into other support functions and
the business units. This approach is especially relevant
for those institutions where the Basel II efforts were
driven by a relatively narrow group within head-office
risk management and which predominantly focused on
compliance with little buy-in into the business
benefits.
Yet
another approach, followed by many institutions that
have now reached the tail end of their Basel II work, is
simply to move on to the topics of the new
risk-management agenda as a natural extension of the
final stage of their Basel II work.
The
challenges ahead
Independently of how banks are approaching the new
risk-management agenda, they will find it hard to ignore
it. As banks enter 2008, risk management is therefore
facing a triple challenge:
1.
Dealing with the current crisis, working their way
through the crisis as it unfolds, readjusting to its
consequences in areas such as liquidity management and,
for a large set of institutions, digesting a new wave of
consolidation;
2.
Completing Basel II implementation, including its
rollout across the organisation, rationalising the IT
and data environment, as well as consolidation across
different compliance implementations (IFRS, SOX, etc.);
and
3.
Addressing the new risk-management agenda in the
post-Basel II environment, in particular, satisfying
increased stakeholder expectations and scrutiny
unleashed by Basel II, capitalizing on the investments
in risk already undertaken and realigning the risk
function both in terms of cost efficiency and stepping
up to the next generation of risk-management
capabilities.
If
anybody had hoped that now was the time to sit back to
look over the achievements of years of increasingly
frantic Basel II preparations, that optimism may have
been a little premature. Work in risk-management will
shift away from Basel II, but the work in 2008 and
beyond will be as intense as ever. Getting the
priorities right and the overall approach for addressing
the new risk-management agenda will be the key to facing
this challenge.
(This article is an excerpt from a thought leadership
document entitled “Basel Briefing 13” by KPMG
International. The information contained herein is of a
general nature and is not intended to address the
circumstances of any particular individual or entity.
Although we endeavor to provide accurate and timely
information, there can be no guarantee that such
information is accurate as of the date it is received or
that it will continue to be accurate in the future. No
one should act on such information without appropriate
professional advice after a thorough examination of the
particular situation. KPMG and the KPMG logo are
registered trademarks of KPMG International, a Swiss
cooperative.
For comments or inquiries, please e-mail Elizabeth R.
Locsin at elocsin@kpmg.com.ph or Gillian de Guzman at
gddeguzman@kpmg.com.ph.) |
