SunGard-Sponsored Survey by PRMIA Highlights Challenges in Risk Managers’ Ability to Meet Basel Financial Reform Proposals
A new SunGard-sponsored survey by the Professional Risk Managers’ International Association (PRMIA) explores bank risk managers’ responses to the Basel Committee’s recent paper on strengthening the resilience of the banking sector. More than 360 risk managers were surveyed by PRMIA on their viewpoints regarding the various Basel Committee proposals on financial reform.
The objective of the Basel Committee's reform package is to improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spill-over from the financial sector to the general economy. In the survey, risk managers were asked to respond to the proposed increases to capital charges, changes to credit and counterparty risk calculations, whether or not perceived weaknesses in risk management processes are warranted, and the greatest challenges in meeting new requirements. The purpose of the SunGard-sponsored PRMIA survey was to capture and analyze risk managers’ viewpoints on the Basel reform package and their ability to support the proposed changes.
One of the topics covered in the survey is the need for banks to improve operational effectiveness of their collateral departments by adopting appropriate systems, data integrity and staffing levels. Only 14.7% of respondents believe that their collateral management departments perform well. 37.1% said that they need both more staff and more investment in systems. Slightly more than one in ten banks (11.1%) has have no dedicated collateral management department. In addition, 30.4% believe that a shortfall in risk management expertise is the greatest challenge to meeting the latest Basel proposals relating to counterparty credit risk, while 20.1% believe it to be the limitations of their technology.
Credit backtesting does appear to be a weak spot with only 16.6% professing to have a regular and robust credit back-testing process in place, and 45.6% having very little or no back-testing in operation. Over a third (35.1%) have no counterparty stress testing process in place, while a near equal amount (36.6%) run static tests no more than four times a year. In terms of the ability to measure and monitor wrong-way risk, 32.9% have no active monitoring process in place, and 38.1% rely on manual methods. Just 6.0% are able to measure wrong-way risk, quantify it, and include it in pricing decisions. More than half (56.7%) of respondents perform no reverse stress testing of any kind.
Other findings from the survey included the following:
• 84.5% of respondents agreed that the proposed 1.25 multiplier to the Asset Valuation Correlation (AVC) in computing regulatory capital would have a significant impact on their businesses.
• 6.9% feel central counterparties (CCPs) are a panacea to the problems of counterparty risk, and 16% feel that CCPs are good in theory but will not work in practice.
• 12.7% said they are fully equipped to deal with the suggested changes to calculate credit measures through the use and maintenance of historical market data, while 36.2% said they would need to start gathering data from scratch.
• 61.9% have nothing in place currently to cater for the proposed charges for Credit Valuation Adjustment (CVA) risk; however, few risk managers imagine the new capital charge will have a great impact on their future investment in CVA calculations.
Steve Lindo, PRMIA’s executive director, said, “In the aftermath of the financial crisis, it was clear that changes were needed in the banking sector’s risk management processes. However, many risk managers recognize that there is still much room for improvement in their collateral and risk management performance. In some areas, risk managers reached a clear consensus on the key challenges at hand, while in others the range of responses suggests that the industry is not yet at a stage of universal readiness for the changes that are expected.”
Mat Newman, head of product management at SunGard’s Adaptiv business unit, said, “This survey highlights the continuing need for risk managers to increase the efficiency of their processes, data and technology for collateral and risk management in order to meet the requirements under the proposed Basel reform package. Systems that are effective in handling a range of stress testing, risk measurement and other collateral management aspects in an integrated fashion will help banks and the industry to gain strength and stability.”
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