“Financial institutions did not empower their risk management functions enough to curb the activities of risk takers which played a major role in the near collapse of the international financial system in 2008,” concludes a report from the Economist Intelligence Unit (EIU) co-sponsored by insurer, ACE European Group (ACE).
The risk management function within organizations appeared to lack the authority needed to take decisive and necessary action. The report, based on in-depth interviews with leading participants from the financial services sector and independent risk experts, explores the lessons learnt and recommends some practical steps financial institutions should now take to facilitate recovery and the rebuilding of trust.
Andrew Kendrick, CEO and Chairman of ACE European Group commented: “The role and scope of the risk management function has matured significantly however, following the financial crisis, many people were asking if more should have been done in terms of empowering risk managers to rein in the excesses of risk-takers.
“Events have highlighted just how important the role of the risk manager is and we believe the steps highlighted in the report are important to help redress the balance between risk taking in the drive for profit within an organization and risk management.”
While the function’s shortcomings may have contributed to the financial turmoil, there are some very specific lessons that can be learnt that place the risk management function in a strong position to help avoid similar problems in the future. A series of 10 measures are put forward in the report covering the role, position and levels of expertise needed in the risk management function through to the structures and systems used.
The central conclusion of the report is that, while many institutions are already reappraising their internal risk management procedures, there is often a far more fundamental question to be addressed relating to the actual culture of the organisation. The question is whether the individual concerns of risk managers have until now all too often been marginalised. Only by adopting the steps suggested, the report says, can institutions start to overcome the challenges they face in providing an effective risk management capability for the 21st century.
The paper, “Managing risk in perilous times: Practical steps to accelerate recovery,” is available free to download at:
Some of the steps include: “Risk management must start at the top. “Institutions must review senior level risk expertise. Risk management must be consolidated across all operations,” and avoid over reliance on data from external providers.