Comprehensive Risk Management Approach Improves Financial Performance

Financial benefits from risk management

The survey sponsored by FIS highlights that banks having a separate board-level risk committee report higher median ROA and ROE.

The FIS-sponsored “2014 Risk Practices Survey” notes a number of important best practices have begun to emerge over the last few years in the management of risk. The survey was conducted in January and is based on 107 online responses from independent directors and senior bank executives, primarily chief risk officers, of banks with over $1 billion in assets.

Mandate under Dodd-Frank Act

The survey points out that the Dodd-Frank Act mandates publicly traded bank holding companies with over $10 billion in assets to establish separate risk committees of the board and banks over $50 billion to additionally hire chief risk officers.

The survey points out that sensing the benefits, smaller banks are also proactively following suit.

The survey highlights that a best-practice approach can positively impact financial performance of banks. However, many banks still have some fine-tuning to do when it comes to risk management.

Benefits accrue from separate risk committee

The survey results reveals that respondents whose banks have a separate board-level risk committee report a higher median return on assets (ROA) at 1.00 and higher median return on equity (ROE) at 9.50, as compared to banks that govern risk within a combined audit / risk committee or within the audit committee.

The following table captures the enhanced financial performance from banks having board-level risk committee:

The following table highlights how the board from banks of different sizes primarily handle risk governance:

Risk governance by board Risk Management

Despite the benefits accruing from having a separate risk committee, some banks have not chosen to establish a separate risk committee. The following graph highlights the reasons for not going for such a separate risk committee:

Reasons for not establishing a separate risk committee Risk Management

Benefits from training

57% of directors to the survey feel that the board could benefit from more training in understanding how new regulations impact and pose risk to the bank, while 53% want a deeper understanding of emerging risks, such as risks associated with cyber security or Unfair, Deceptive or Abusive Acts or Practices (UDAAP).

The following graph captures the respondents’ feedback on benefit from education and training to the board:

Benefit from training Risk Management

Over half of bank officers and 40% of respondents overall, highlighted that maintaining the technology and data infrastructure to support decision-making is a top risk management challenge. The following table captures the growing need for technology to support risk-related decision-making:

Biggest risk management challenges

About the Author

Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports