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Most banks not using risk tools

BIBM survey on CROs reveals propensity to keep certain bank clients outside risk management review

Mehdi Musharraf Bhuiyan | February 10, 2018 00:00:00

Almost two-third of the country's banking entities are not using risk tools in their decision making procedure, according to a recent survey conducted on the chief risk officers (CROs) of the banking institutions.

At the same time, a large portion of the bank governing bodies are 'not leading by example', the survey also revealed.

Bangladesh Institute of Bank Management (BIBM) conducted the survey on CROs as part of its study on the prevailing risk culture in the country's banking sector.

The survey has touched upon a number of issues related to risk culture from the point of tone at top, accountability as well as effective challenge and incentivisation, and has revealed a number of 'surprising' and 'not so encouraging' findings regarding the banking industry.

When the CROs participating in the survey were asked that whether their respective bank boards demonstrate alignment of mission, vision and values, 19 per cent of them responded 'mostly not' while 26 per cent said 'sometimes'.

It means that 45 per cent or almost half of the respondents do not see their bank boards demonstrating consistent alignment to their stated mission, vision and values.

At the same time, when asked whether their boards are leading by example, only 29 per cent of the CROs responded positively, while 13 per cent answered 'mostly not', and the rest 58 per cent said 'sometimes'.

While analyzing how much the bank governing bodies utilize risk tools in decision-making, it was found that only 37 per cent of the respondents had seen the risk appetite techniques being used by the bank boards in relation to business strategy.

At the same time, when the CROs were asked if they could point to examples where risk appetite considerations impacted strategic decision-making that reduced immediate profitability, 68 per cent of them could not think of direct examples.

"Risk management, above all, is a team game," Director General of BIBM Dr. Toufic Ahmad Choudhury told the FE, when asked about the significance of these findings.

"The task of risk management in a bank should not be left for the risk department alone. But it should trickle down from board members to every level of the bank management," he added.

"In this rapidly changing world, the nature of risks also changes very rapidly," said Helal Ahmed Chowdhury, Supernumerary Professor of BIBM.

"Therefore, board members should be appraised and informed about the evolving risk issues from time to time and should also be involved in preemptive risk management, so that the board and management are on the same footing on how to mitigate the risks," he added.

"In the prevailing context of Bangladesh's banking industry, the bank management needs to raise the risk management-related issues to the board on a regular basis," said Sajib Azad, Senior Advisor of BIBM, who led the survey.

"At the same time, the opinions and judgements of the CROs need to be taken more seriously when it comes to risk management," he added.

About 63 per cent of the respondents of the survey stated that either returns reflect risks inconsistently or not reflective at all. This means that not only are majority of the boards not using the risk tools to consistently balance risk and reward, this balance is also not being achieved further down-stream.

When asked that whether risks are accurately factored into decision-making, 47 per cent or almost half of the CROs stated that this is not the case in a consistent basis.

Besides, when asked whether the businesses and products are appropriately 'charged' for risks undertaken, it was found that this is not happening consistently in 71 per cent of the banks, while this is 'not happening at all' in 21 per cent of the banks.

About 87 per cent of the surveyed CROs also said there are individuals or business lines that are considered 'untouchables' or are outside the review by risk management and other internal controls.

The survey also revealed that around 76 per cent of the banks do not seek (in a consistent manner) risk approvals of new business and products, while 29 per cent of the banks are not doing this outright.

In 53 per cent of the banks, the robust follow up of risk management and internal audit issues is either inconsistent or not happening at all.

On the other hand, it was found that 29 per cent of the banks do not formally track limit breaches or do not track them at all.

Responding to the question "when the last time an individual was disciplined and compensation was cut as a result of unacceptable risk taking", majority of the CROs (53 per cent) could not recall any example.

About 13 per cent of the CROs said their banks do not have a culture that allows the voicing of concerns, while 47 per cent said its variable. It means that 61 per cent of the banks do not support risk transparency consistently.

In addition, the BIBM survey results also showed that 58 per cent of the bank CROs said their culture does not allow constructive dissent.

Only 39 per cent of the CROs stated that they can give input in strategic decisions in a consistent basis.

When asked if risk management and internal audit are consulted before new products are introduced, only 29 per cent of the CROs said this is the case.

Besides, in only 34 per cent of banks, board and related committee have access to the 'control functions' in a regular basis.

Similarly, only 32 per cent of the banks stated that the boards have unfettered access to the CRO, CFO and other control functions outside board meetings.

When asked, if the CROs have input to business head performance reviews, it was found that this is happening only in 37 per cent of banks.

At the same time, regular risk management input into performance reviews of 'risk takers' is happening in only 37 per cent of banks.

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