Compliance as a Catalyst
Of course, operational efficiency is not the only driver behind ERM. Improved risk management, at least in part, is the goal of several regulations. "Basel II has driven a lot of funding over the last few years when it comes to risk management; so has Sarbanes Oxley," says BearingPoint's Vishnu.
A lot has happened in the past seven years that has led to increased efforts in risk management, IBM's Rosenoer relates, pointing to Sept. 11, 2001, and the bursting of the dot-com bubble. "What the federal regulators and regulators of international banking said is that there wasn't enough transparency in the system to provide the public with the insight it needed to decide what the risks were; and the regulators also did not have a clear view," he says. As a result, the regulators have moved to a risk-based supervision approach. They are charging financial institutions with putting together programs that will assess risk and ensure appropriate controls are in place given that risk, Rosenoer explains.
Federal Reserve Gov. Mark W. Olson told the Financial Services Roundtable in May that an "enterprisewide approach to compliance risk management has become mission- critical for large, complex banking organizations."
"Enterprise risk management is certainly something that has been adopted globally by financial institutions, particularly the larger institutions that understand what Basel II means to their businesses, what Sarbanes-Oxley means to the business," says Fiserv's Garcia, who formerly was a research director at TowerGroup. But, she asserts, "The fact of the matter is that unless there is a regulator breathing down your neck or an urgent deadline, it's hard to mobilize the organization to orchestrate change."
While compliance is one of the key catalysts of ERM adoption, there clearly are other drivers behind it. If an ERM system is used effectively, it can increase shareholder value in an organization by maintaining rating and reputation, lowering cost of capital, reducing the burden and cost of compliance, improving decision making and pricing, and enhancing overall efficiency, according to IBM.
But the main benefit of ERM may be the ability to leverage existing investments to create business value. "In banking, it's all about bringing in more capital and dealing with it more efficiently than your competitor," IBM's Rosenoer says. "If you don't [put ERM in place] when everyone else is doing this, you don't have an efficient operation. Once you put a system like this in place, you'll make a lot more money."
"As technology investments are considered by financial institutions, the question will be asked more and more, 'How can these investments be leveraged across the business?'" Fiserv's Garcia says. Going forward, risk and compliance will be embedded in the business process instead of being an add-on later, she predicts. *
- Page 2: Different Definitions
- Page 3: Evolving ERM Solution
- Page 4: Taking Bites Out of ERM