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Risk Management Policies Expand, But Still Room For Improvement

Financial institutions move toward a more holistic approach to risk management, but a survey by PricewaterhouseCoopers identifies scope for improvement.

Leading financial institutions are moving towards a more holistic approach to risk management but a survey by PricewaterhouseCoopers reinforces the need to continue to strive for improvements in risk management processes.

This survey is a follow up to an e-briefing by PricewaterhouseCoopers launched in July 2002, entitled Taming Uncertainty: Risk Management for the Entire Enterprise. As part of the e-briefing, PricewaterhouseCoopers identified 10 attributes of a world-class risk management culture. The results of the follow-up survey show that many financial institutions already embrace some of these attributes but that even those well-run organizations have significant scope for further improvement.

The survey found that 75 percent of respondents now articulate risk appetite at the group level and half of survey participants have made a senior appointment to oversee enterprise-wide risk. More than 50 percent have revamped policies for the authorization of risk-taking to ensure closer alignment with the organization's strategic objectives. However, just under half the respondents remain dissatisfied with the measurement tools at their disposal and 85 percent see aggregation of data across business lines as an area for improvement.

"Quantification of risk has come a long way over the past decade but our survey indicates that drawing a complete picture of risk appetite and exposure is clearly a daunting task even for pioneering institutions," said Hans-Kristian Bryn, global risk management partner, PricewaterhouseCoopers. "With the forthcoming implementation of the Basel II Accord, which will require banks to put aside capital to cover operational risk, institutions need to tighten up their risk management systems. The increased use and availability of enabling technologies such as XBRL can assist organizations to accelerate the timely and accurate collection, aggregation and dissemination of risk and value related management information."

PricewaterhouseCoopers has drawn a number of recommendations from the results of the survey for financial institutions, notably:

* They must assess the balance between risk and return, showing greater appreciation for the risks to their franchise and shareholder value that do not easily fit into the current planning and risk models.

* Senior management must convert this assessment into a corrective action plan, with clear accountabilities and deadlines reported to the board and disseminated throughout the organization.

* The board must receive clear and timely information about the implementation and results of risk management programs.

* Regular and transparent stress testing of the financial forecast should mitigate the risk of excessive leverage or volatility of earnings.

* Risk-adjusted forecasts should be communicated effectively to external stakeholders.

"Regulators and investors will continue to demand higher standards of accountability for the decisions that financial institutions take," said Juan Pujadas, global financial risk management practice leader, PricewaterhouseCoopers. "Managers are increasingly aware of the value that risk management can deliver to the organization. We anticipate that the movement towards enhanced risk management in all aspects of business conduct and shareholder value creation will not only continue but will also accelerate over the coming months."

To view the survey results and the report Taming Uncertainty: Risk Management for the Entire Enterprise, visit www.pwcglobal.com/financialservices

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