Deloitte

Deloitte

February 28, 2005 08:00 ET

Canadian Corporations Fall Behind the Rest of the World in Managing Escalating Risk, Deloitte Study Finds


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FOR: DELOITTE

FEBRUARY 28, 2005 - 08:00 ET

Canadian Corporations Fall Behind the Rest of the
World in Managing Escalating Risk, Deloitte Study Finds

TORONTO, ONTARIO--(CCNMatthews - Feb. 28, 2005) -

-- Deloitte's Bi-Annual Global Risk Management Survey Measures the State
of Risk Management in the Financial Services Sector --

As financial services institutions around the world face escalating
exposure to risk, a new survey finds that Canada and the United States
lag behind the rest of the world in their ability and preparedness to
deal with increasing risk. Factors such as mergers, off-shoring,
outsourcing, inadequate risk governance and over-ambitious lending all
contribute to escalating risk. The Deloitte 2004 Global Risk Management
Survey, released today, is based on interviews with senior executives
from the world's top 162 global financial institutions. The survey is
intended as a global benchmark for the state of risk management in the
financial sector.

"Financial institutions increasingly recognize that strong risk
management governance should be part of the overall business strategy,"
says Leon Bloom, Managing Partner, Global Financial Services Industry,
Deloitte. "The factors that increase risk in today's environment are
numerous-increasing globalization, accelerated merger and restructuring
activity, security management concerns, complex lending and investment
issues, shifting industry regulations and increasing public scrutiny.
Now more than ever, Canadian corporations need to fully assess their
risk management requirements to enable them to implement the best
solutions to benefit their long-term business goals. Failure to fully
recognize and manage risk will have serious consequences for Canadian
corporations in regulatory terms as well as business performance. The
inability to deal with risk will ultimately affect an institution's
bottom-line."

According to the survey, financial services companies worldwide are
clearly recognizing the need to effectively manage risk, as evidenced by
the significant increase in companies that have established the position
of Chief Risk Officer (CRO) - up to 81 per cent in 2004 from 65 per cent
in 2002. Despite the global trend, Canada, along with North America,
lags behind the rest of the world with only 75 per cent of companies
stating they have a CRO.

The survey findings indicate that risk management is increasingly being
recognized by senior management as a key component of a company's
overall business strategy, with three quarters of CROs in financial
services firms reporting to the chief executive or board of directors.

Deloitte 2004 Globe Risk Management Survey: Main Findings

- Continued influence of regulators on risk management trends:

The survey indicates that a tougher regulatory environment (post-Enron)
has contributed significantly to a greater emphasis on risk management.
In 2004, the Bank for International Settlements established a revised
new capital adequacy framework for banks, known as Basel II. The survey
indicates just over one-third of firms feel they meet the standard
framework requirements. Meanwhile, the Sarbanes-Oxley Act in the U.S.
and similar legislation, such as Bill 198 in Canada, have clearly
elevated the importance of corporate governance, board oversight,
internal controls, and financial disclosures - with the threat of
criminal prosecution for non-compliance.

- Enterprise Risk Management (ERM) continues to be an elusive goal:

Despite the increasing emphasis on containing risk, the survey shows
that ERM continues to be an elusive goal for many institutions globally
(including those in Canada) with less than one-quarter of survey
participants stating that they are able to integrate risk across any of
the major dimensions of risk type, business unit, or geography. The
focus of companies with respect to ERM is on measuring economic risks
including credit, market, operational, and liquidity. And while 38 per
cent of respondents say they have integrated the organizational
structure required to deal with these risks, only 15-16 per cent
reported progress in integrating methodology, data, and systems.

- Credit Risk Management:

Beyond regulatory developments, organizations are investing in credit
risk infrastructure improvements because of growth, merger integration
and competitive pressures. In the area of credit risk management,
respondents reported significant progress since the 2002 survey. The
influence of Basel II requirements, commercial credit market
difficulties, and increased lending volume spurred by low interest rates
in the consumer sector have caused management to focus more attention on
strengthening credit risk capabilities. As a result, 61 per cent of
respondents are planning a high or moderate level of investment in the
next 12-24 months for commercial credit, and 53 per cent for consumer
credit.

- Off-shoring, near shoring and outsourcing becoming global trends
bringing new challenges:

These new business strategy trends have introduced novel and challenging
risks into firms' risk profiles. Communication complexities compound
this problem where affiliates are operating in countries with different
cultures, geographies and time zones. When it comes to off-shoring,
near-shoring and outsourcing arrangements across a variety of corporate
functions, survey respondents reported that information technology and
application management was the only area where a majority (61 per cent)
employed an Extended Enterprise Solution (EES). Just less than half of
the respondents use EES for call centres or back office processing.

- Operational Risk Management continues to emerge:

According to the survey, Operational Risk Management (ORM) continues to
be considered a challenging and relatively new field compared to more
established risk management disciplines, with Canada and North and South
America noticeably behind Asia-Pacific and Europe in terms of ORM
program progression. However, the survey does show an increase over 2002
in the number of firms that have established ORM programs even though
the majority of respondents indicated that at least some improvement in
functionality is still required.

- Market Risk and Asset/Liability Management:

The survey shows that in terms of market risk, many firms are adding
coverage of additional product types such as asset-backed securities.
They have also increased their use of advanced modeling techniques such
as event risk and they are doing more stress testing, which indicates
more attention is being paid to current market risk analysis. In the
asset/liability management arena, the survey shows that financial
institutions are building upon the core analytics and methods that have
been in place.

- Risk systems and technology:

While information technology is considered to be the key enabler of risk
management architecture, respondents report a host of continuing
challenges in developing adequate risk systems. More than half (52 per
cent) cited a lack of integration among systems as a major concern and
42 per cent cited it as a minor concern. Lack of flexibility and
scalability as well as performance issues were also noted as key
challenges. Improving regulatory-related systems capabilities and
implementing operational risk management and advanced credit risk
systems were the three highest priority items cited by respondents in
the systems development and technology area.

To access the study, please visit: www.deloitte.ca

About the 2004 Global Risk Management Survey

Deloitte's fourth biannual survey, which serves as a global benchmark
for risk management in financial services firms, contains responses from
162 financial institutions on six continents with assets totaling nearly
$19 trillion. The survey sample included responses from 12 financial
services sectors in four broad categories: investment banking and
related services, commercial banking, integrated financial services, and
retail banking. Respondents answered questions which addressed the range
of key risk management issues facing financial institutions including:
Risk Governance, Economic and Regulatory Capital, Enterprise Risk
Management, Credit Risk Management, Market Risk and Asset/Liability
Management, Operational Risk Management, Risk Systems and Technology and
Extended Enterprise Solutions. For more information about Deloitte's
Financial Services Group, visit www.deloitte.ca.

About Deloitte

Deloitte, one of Canada's leading professional services firms, provides
audit, tax, consulting, and financial advisory services through more
than 6,100 people in 47 offices. Deloitte operates in Quebec as Samson
Belair/Deloitte & Touche s.e.n.c.r.l. The firm is dedicated to helping
its clients and its people excel. Deloitte is the Canadian member firm
of Deloitte Touche Tohmatsu. Deloitte refers to one or more of Deloitte
Touche Tohmatsu, a Swiss Verein, its member firms, and their respective
subsidiaries and affiliates. As a Swiss Verein (association), neither
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related names. Services are provided by the member firms or their
subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu
Verein.


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