Early Preparation is Critical

An article in Wall Street Technology this week emphasizes the need for financial institutions to prepare for the coming wave of new rules and regulations.  Here is a sample of their view.

The Obama administration's new proposals to regulate the financial industry, which respond to calls for greater transparency and oversight, will completely overhaul the way Wall Street firms operate. But even while specific regulations still are being mapped out, it is vital for financial institutions to prepare now to comply with any new rules that may be coming down the road.

Brian Cummings, director of information risk management, Tata Consultancy Services, North America, agrees that it is more essential than ever for firms to consolidate their risk and compliance efforts, rather than to just bolt on new tools. "You can't have IT doing its own thing and accounting doing its own thing too," he insists. "You need to take an enterprise view of risk management and consolidate your efforts." Then firms can use the appropriate tools to analyze their risk exposure, Cummings continues. "That's powerful, as trying to do it on an ad hoc basis makes it very difficult to get a grand view of where you are," he says.

A streamlined, efficient approach to enterprise risk management can yield great cost savings and provide firms with a true competitive advantage over rival institutions.  Wheelhouse Advisors can help craft a cost-effective plan for your company to implement an integrated enterprise risk management program.  Learn more at www.WheelhouseAdvisors.com.

Weak Links in Risk Management Programs

An article published in the current issue of Bank Systems & Technology discussed the weak links in the risk management infrastructures of some of the larger financial institutions during last year's economic meltdown.  It seems that many institutions had to rely on highly manual, time consuming processes to understand their full risk exposures. Here is their view.

Weaknesses in the infrastructure often limited banks to identifying and aggregating exposures across the bank. A fragmented risk architecture dispersed over a multitude of systems made the reconciliation of the relevant data a time-consuming exercise, which was at best semi-automated, but more often a manual process. This led to banks needing far too long to aggregate their exposures and other relevant accounting and risk figures on a firmwide level. In the bankruptcy case of Lehman Brothers, for example, it was reported that it took some banks more than three weeks to determine their overall exposure to Lehman.

An inflexible risk environment within the banks rendered them incapable of reacting to sudden changes driven by external and internal circumstances—for example, the ability to perform ad hoc stress tests to assess the impact of new stress scenarios designed to address a rapidly changing environment.

In short, the interlinkage among risk types was not captured. The recent crisis has exposed the strong dependency among credit risk, market liquidity and funding liquidity pressures. Banks need to move away from silo-based risk management to achieve a more integrated and connected way of managing risk.

An integrated approach is not only required, it is also the most cost-effective solution in times like these.  Wheelhouse Advisors provides services to help companies build an integrated risk management program.  Visit www.WheelhouseAdvisors.com to learn more.

Much More Enterprise Risk Management Work Remains

A recent report by Governance Metrics International ("GMI") demonstrates that most major public corporations have a great deal of work remaining to improve their enterprise risk management practices.  GMI rates corporate governance and risk management practice for 4,162 companies worldwide.  Here is a summary of the major findings from the report.

Standardized disclosure of company-wide risk management is lacking

• Only 33.1% of the 4,162 companies covered by GMI worldwide provide comprehensive disclosure on their enterprise risk management policies (ERM) in the annual report or other publicly available source


• Only 8.4% disclose they have implemented a nationally or internationally recognized risk management charter or standard such as COSO's Integrated Framework for Enterprise Risk Management

Risk committees of the board are even less common and are sector-specific

• 27.6% of companies covered by GMI disclose having a combined audit and risk committees


• 5.9% of companies covered by GMI disclose a stand-alone board level risk committee or subcommittee


• These were most often found among Banks (35.1%), followed by Life Insurers (21.3%) and Non-life Insurers (17.6%)


• There were no stand-alone board level risk committees or subcommittees in 11 of the 41 sectors covered by GMI

According to GMI President and CEO Howard Sherman, “Events of the last year have made it clear there is a need for heightened risk oversight at the board level. As companies start to come to grips with the challenge, we thought now would be the right time to start to develop a baseline. Our expectation going forward is that companies seen to be taking serious steps to augment risk oversight, especially in the financial sector, will be rewarded by the market.”

Wheelhouse Advisors is prepared to help your company improve its corporate governance and risk management practices in a cost-effective manner.  Visit www.WheelhouseAdvisors.com to learn more.

Resorting to Plan C

This week, the Washington Post revealed that the U.S. Treasury has launched an internal effort to determine the size and nature of credit risk across the U.S. financial system.  The effort is portrayed as the development of a last-ditch plan to understand the full scope of credit risk and where it resides.  Here is how the Post described the effort.

Informally known as Plan C, the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks, said government sources familiar with the effort.

Part of the mission is assessing which firms are the most vulnerable and trying to decipher what assets these companies hold and whether they pose a danger to the wider financial system. Plan C is a small-scale, relatively informal approach to a problem the administration hopes to address in the long term by empowering the Federal Reserve to oversee systemic risk.  The creation of Plan C is a sign that the government has moved into a new phase of its response, acting preemptively rather than reacting to emerging crises, officials said.

This revelation is somewhat disturbing and promising at the same time.  It is disturbing that the government is just now beginning to work on an effort such as this, but promising in that they are working to prevent future problems rather than just cleaning-up after the fact.

Keys to Success for a Chief Risk Officer

In a recent article written by John A. Wheeler of Wheelhouse Advisors LLC, the evolving role of the Chief Risk Officer ("CRO") is examined.  Many companies are either elevating the role or creating the role anew.  To be successful, companies must be aware of what is ultimately required for both the role and the person assuming the position.  Here is a brief excerpt from the article addressing this issue.

The true CRO should be the champion and ultimate sponsor of ERM within an organization. To succeed in achieving this objective, the role requires the commitment and full support of both the board of directors and CEO. In addition, the role requires a unique skill set that combines a deep understanding of the business, an appreciation for risk management principles, strong leadership capabilities, and a strategic mind-set. This is a tall order for most organizations, especially when budgets are tight and short-term earnings pressures are so acute.

The challenges do not end there. At the core, the organization's culture must align with and support the ERM program. This means that its managers and employees must have a certain level of risk awareness as well as a willingness to own the risks they take. This is created by leadership emphasis from the CEO, CRO, and other senior management members. However, more importantly, the compensation and performance management structure must be designed to provide incentives for appropriate behavior within an organization's risk appetite.

Simply appointing someone to the position of Chief Risk Officer without understanding what the role requires or addressing the cultural implications will result in certain failure.  Wheelhouse Advisors can help your company establish the proper environment for a Chief Risk Officer to succeed.  To learn more about how Wheelhouse Advisors can help, visit www.WheelhouseAdvisors.com.

Regulatory Reform Details Begin to Emerge

Details of the Obama administration's plan for regulatory reform are beginning to trickle out and it appears as though the devil for financial institutions is truly in the details.  Here is what the Associated Press reported yesterday.

Under the administration's proposal, companies such as Citi, Goldman Sachs and others in a broad top tier engaged in complex transactions would face stricter scrutiny and have to hold more assets and more cash as cushions against a downturn. They also would have to anticipate their own demise, drafting detailed descriptions of how they could be dismantled quickly without causing damaging repercussions. Think of it as planning their own funerals — and burials.

Obama's plan, in short, aims to make it far less appealing to be so big. That was the middle ground the administration sought, a step short of an outright ban on systemically risky companies. "Without banning them we're providing some pretty heavy penalties for entering" the top group of institutions that could pose a risk to the entire financial system, said Diana Farrell, deputy director of the White House's National Economic Council. "The regulator might say to a large institution, 'Make sure there is very good reason to allow yourself to get that big, or that interconnected, or that complex because the penalties will wipe out any advantages, such as lower cost of capital, you might have.'"

Large financial institutions in the U.S. will face many regulatory challenges and should be preparing their companies for the imminent changes to come.  Many of these companies' strategic plans will be impacted by the new rules and the risks they carry.

Shifting Risk Landscape Requires Greater Focus

The current issue of Harvard Business Review is dedicated to providing insights and recommendations on managing in the new "post-meltdown" world.  One article focuses squarely on the impact to risk levels throughout an organization and how companies are responding.   Here is what they reported.

Since the recession set in, many shifts have occurred in the enterprise risk environment; some threats are rising, while others are falling. Security budgets are being cut deeply and pervasively—though not always in ways responsive to these fluctuations. Security directors must do more with less while helping their businesses clearly understand the shifting threats and ensuring that the most urgent priorities are addressed. For that reason alone, adopting an enterprise risk perspective as a recession coping strategy is itself an urgent priority.  The goal of enterprise risk management is to track, quantify and analyze these shifting thresholds of risk throughout an organization.

Companies must find ways to work smarter and more efficiently.  One of the most effective ways to streamline enterprise risk management is to adopt an integrated approach that aligns all risk related functions and eliminates redundant activities.  Wheelhouse Advisors can provide a quick diagnostic review to determine how your company can improve its enterprise risk management program in a cost-effective manner.  Visit www.WheelhouseAdvisors.com to learn more.