The Senior Supervisors Group (SSG), a group comprised of senior financial supervisors from seven countries (United States, Canada, France, Germany, Japan, Switzerland, United Kingdom) issued a report that evaluates how weaknesses in risk management and internal controls contributed to industry distress during the financial crisis.
The report, titled "Risk Management Lessons from the Global Banking Crisis of 2008," reviews the funding and liquidity issues central to the recent crisis and explores critical areas of risk management practice in need of improvement across the financial services industry.
The report concludes that despite firms' progress in improving risk management practices, underlying weaknesses in governance, incentive structures, information technology infrastructure and internal controls still require substantial work to address.
Among the study's findings is the fact that the crisis illustrated that many firms' IT infrastructures were inadequate when it came to supporting the broad management of financial risks. Poor integration of data as the result of M&A activity was an obstacle to improving risk management systems in some cases, for example. This problem has been seen as affecting firms' ability to implement effective transfer pricing, consistently value complex products throughout an organization, estimate counterparty credit risk (CCR) levels, aggregate credit exposures quickly, and perform forward-looking stress tests, noted the study. The SSG recommended firms build more robust infrastructure systems, especially when it comes to handling transaction volumes during periods of stress. Although this would require a significant commitment of financial and human resources on the part of firms, it is viewed as critical to the long-term sustainability of improvements in risk management.
Although the study did acknowledge that firms were ramping up their efforts in upgrading their risk management infrastructures, many projects are still in their infancy or the planning stage.
The report is the result of two initiatives by the SSG in which interviews were conducted with firms about funding and liquidity challenges. Companies were also given a self-assessment exercise in which they were asked to benchmark their risk management practices against a series of recommendations and observations taken from industry and supervisory studies published in 2008.
These initiatives were conducted to support the priorities of the Financial Stability Board whose mission is to address vulnerabilities affecting the financial system and to promote global financial stability.
The report was a joint effort between nine supervisory agencies, including the Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the Federal Reserve in the United States. The other agencies are the Canadian Office of the Superintendent of Financial Institutions, the French Banking Commission, the German Federal Financial Supervisory Authority, the Japanese Financial Services Agency, the Swiss Financial Market Supervisory Authority, and the U.K. Financial Services Authority.