Economist Enterprise Risk Management Survey 2009

The Storm  According to the latest Financial Stability Report from the International Monetary Fund: • Global bank losses are likely to exceed US$4.1 trillion. • In their efforts to bail out the banking system and deal with wider economic pain, public debt for the G20 countries will mushroom to more than 100% of GDP in 2014. Copyright © 2009, SAS Institute Inc. All rights reserved.

About the research  Research took place March to May 2009  Survey of 334 financial services executives  50% C level – all have responsibility for risk  Even global distribution  Programme of in-depth interviews with high-level experts Copyright © 2009, SAS Institute Inc. All rights reserved.

An erosion of confidence… How do you currently rate the prospects for your business in the following areas over the next year? Revenue growth 33 % 36 % 31 % Positive Profitability 32 % 35 % 32 % Neutral Negative Share price 21 % 47 % 32 % 0% 20% 40% 60% 80% 100% Copyright © 2009, SAS Institute Inc. All rights reserved.

...and a retreat from risk Over the next year, what change do you expect to the geographical focus of your organisation? Domestic 67 % 26 % 8% market Overseas Greater focus developed 28 % 33 % 38 % No change markets Lesser focus Overseas emerging 37 % 29 % 34 % markets 0% 20% 40% 60% 80% 100% Copyright © 2009, SAS Institute Inc. All rights reserved.

Reforms to risk management will be far-reaching Which of the following statements best describes your organisation’s current status with the review of its risk management in response to recent market events? We have already conducted a thorough 32 % overhaul of our risk management We intend to conduct a thorough overhaul of our risk management, but have not yet 21 % completed it We have made some minor changes to our risk 27 % management We intend to make some minor changes to our risk management, but have not yet completed 12 % them We do not intend to make any changes to our 5% risk management We are waiting to see how the market develops before deciding whether to review our risk 3% management 0% 5% 10 % 15 % 20 % 25 % 30 % 35 % Copyright © 2009, SAS Institute Inc. All rights reserved.

“ Responsibility for risk management must lie primarily with the business, not over- ” relying on the risk function. — Charles Beach, regulation and compliance partner at PricewaterhouseCoopers Copyright © 2009, SAS Institute Inc. All rights reserved.

Reforms will also be comprehensive Over the next year, what do you expect to be the three key areas of focus in the management of risk in your organisation? Improving data quality and availability 41 % Improving governance of risk 33 % Developing “firm-wide” approach to risk 29 % Embedding risk management within lines of 28 % business Better and more sophisticated analytics 27 % Improving communication and understanding 24 % between risk function and lines of business 0% 5% 10 % 15 % 20 % 25 % 30 % 35 % 40 % 45 % Copyright © 2009, SAS Institute Inc. All rights reserved.

“ Risk reports provided to the board and senior management need to be capable of focusing on the firm’s current key risk issues rather than providing a torrent of data that cannot be realistically digested and used as a basis for effective decision- making ” — Charles Beach, regulation and compliance partner at PricewaterhouseCoopers Copyright © 2009, SAS Institute Inc. All rights reserved.

Culture, expertise and data are the main barriers What are the three main barriers to improving risk management in your organisation? Insufficient quality of data 40 % Lack of expertise 32 % Lack of risk culture among broader business 31 % Inadequate systems 30 % Poor communication across organisational silos 30 % Lack of investment 20 % 0% 5 % 10 % 15 % 20 % 25 % 30 % 35 % 40 % 45 % Copyright © 2009, SAS Institute Inc. All rights reserved.

“ In banking, the risk function takes prime responsibility for dealing with risk, rather than for embedding risk management throughout the business, and this surely can’t be a sensible approach. The key is risk awareness and creating a risk culture, not letting a single function deal with it as though it were a business line in itself. ” — Steve Fowler, chief executive of the Institute of Risk Management Copyright © 2009, SAS Institute Inc. All rights reserved.

Transparency is a common theme Which of the following proposed reforms do you think will be most beneficial to the financial services industry? Greater disclosure of off- 34 % balance-sheet vehicles Stronger regulation of 31 % credit rating agencies Caps on leverage 29 % Central clearing for over- 28 % the-counter derivatives Expansion of regulatory oversight to other areas 25 % of financial services not currently regulated 0% 5% 10 % 15 % 20 % 25 % 30 % 35 % 40 % Copyright © 2009, SAS Institute Inc. All rights reserved.

A lack of confidence in supervisors How confident are you in the ability of the regulators in the country in which you are based to carry out the following initiatives? Maintain overall stability of the financial system 53 % 19 % Restore trust in the banking system 43 % 20 % Put in place sufficient skills and expertise to keep pace with innovation in the banking system 30 % 37 % Confident Not confident Co-ordinate work of regulatory bodies across borders 25 % 37 % Require implementation of compensation policies that support long-term shareholder value creation 24 % 41 % Monitor credit rating agencies and prevent conflicts of interest 18 % 49 % 0% 20% 40% 60% 80% 100% Copyright © 2009, SAS Institute Inc. All rights reserved.

After the Storm… conclusion  Change is not merely desirable now, it is critical to firms’ survival and their ability to compete in a marketplace that will inevitably become more rules-based and hence more complicated.  The best firms with the brightest people embrace change. They will adapt and prosper in the new environment.  Successful firms know that the answer to the big question of the past several months is not to take risk off the table.  Without taking clever, calculated, controlled risks, no firm can be successful. Risk, in the final analysis, is not a function within a firm, it is the firm. Copyright © 2009, SAS Institute Inc. All rights reserved.

“ The important lesson is that bank regulators cannot fully or accurately forecast whether, for example, sub-prime mortgages will turn toxic, or a particular tranche of a collateralised debt obligation will default, or even if the financial system will seize up. A large fraction of such difficult forecasts will invariably be proved wrong. ” — Alan Greenspan, former chairman of the Federal Reserve Copyright © 2009, SAS Institute Inc. All rights reserved.

Economist Enterprise Risk Management Survey 2009

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