Banks turning attention to risk management: S&P

A new study by Standard & Poor’s Risk Solutions suggests credit risk management is drawing the attention of banks worldwide.
Following up on a 2001 survey, the survey focused on senior executives from more than 30 banks of various size and location with average assets of US$100 billion.
Results show that progress has been made on the risk management front, points out Karen Van de Castle, director of credit risk services for S&P. “Banks face the same challenges in establishing enterprise-wise risk management practices, but they have made strides in managing performance data and implementing and validating systems that capture and evaluate the risks they face.”
Banks are working to produce more precise internal rating systems, with most banks implementing dual rating systems. However, making distinctions in quality remains a challenge, with about one-third of banks saying 30% of their exposure still lies within a single grade. Of note, responsibility for reviewing ratings has moved from the credit department to the risk management department in many cases.
While the quality of data is improving, banks still struggle with the collection and integration of operational loss data. In fact, defining operational risk remains the first hurdle banks much overcome, notes Van de Castle.
Several banks remain undecided when it comes to the new Basel II standards, whether they will comply or not, and if so, what approach they will take to compliance. “Estimates for total costs to implement Basel II vary greatly, from less than US$1 million to US$100 million, largely depending on the size of the bank,” Van de Castle says of those banks working to comply with the standards. Most banks expect to be prepared to comply with the material aspects of Basel II by 2006, she says.
Whether as a result of regulatory requirements or public pressure, most banks are taking a more cohesive approach to risk management, Van de Castle concludes. However, challenges remain, she says, adding, “as more time passes, banks globally will continue to find themselves operating in an increasingly dynamic environment, forcing them to execute their risk management strategies and adopt management systems that can quantify, measure and monitor at tomorrow’s pace.”
More information on the survey is at www.risksolutions.standardandpoors.com.