Last week, the Senior Supervisors Group (SSG), comprised of senior financial supervisors from seven countries, issued a report on the funding and liquidity issues that were part of the recent financial crisis. In particular, the report examines the "critical areas of risk management practice in need of improvement across the financial services industry."
Despite recent focus on improving risk management, the report, "Risk Management Lessons from the Global Banking Crisis of 2008," concludes that the following are still areas of weakness, and should be addressed further and more vigorously:
- Governance. The failure of some boards of directors and senior managers to establish, measure, and adhere to a level of risk acceptable to the firm;
- Incentive structures. Compensation programs that conflict with the control objectives of the firm;
- Information Technology Infrastructure. Inadequate and often fragmented technological infrastructures that hinder effective risk identification and measurement;
- Internal controls. Institutional arrangements that confer status and influence on risk takers at the expense of independent risk managers and control personnel.
The report is signed by all of the members of the SSG, a joint enterprise of the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Reserve in the United States, 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. Though highly critical, the report is intended to raise awareness rather than fix blame, and encourage more progress in strengthening the risk function and risk awareness among financial firms.
In highlighting the areas where firms must make further progress, we seek to raise awareness of the continuing weaknesses in risk management practice across the industry and to evaluate critically firms’ efforts to address these weaknesses. Moreover, the observations in this report support the ongoing efforts of supervisory agencies to define policies that enhance financial institution resilience and promote global financial stability.
The full text of the report, "Risk Management Lessons from the Global Banking Crisis of 2008," is available at: http://www.sec.gov/news/press/2009/report102109.pdf