Banks Urged to Adopt Risk-Adjusted Performance Measurements
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In a significant shift towards more robust risk management practices, banks are being advised to adopt risk-adjusted performance measurements to account for the risks taken in their financial activities. This move comes as most banks already use Value at Risk (VaR) measures to assess portfolio risks.
Current State of Risk Management Practices
According to a recent survey of 17 banks, only half have implemented VaR limits or plan to do so soon, while the majority still do not use risk figures for capital allocation purposes. End-of-year bonuses may need to be recalculated to reflect the level of risk taken on by financial activities.
Challenges in Risk Management
The survey also found that most banks lack a strong risk management group with permanent training and knowledge updates. Only four out of 17 banks are subscribed to technical publications related to VaR calculations, highlighting the need for investment in quantitative analysis. Furthermore, while almost all banks conduct periodic stress tests of their portfolios, only nine banks have sophisticated procedures, indicating a need for improvement in this area.
Recommendations
The survey’s findings highlight the importance of adopting risk-adjusted performance measurements, conducting regular backtesting procedures, and maintaining a strong risk management group with ongoing training and updates. These measures are crucial to ensuring that banks can accurately assess and manage their risks, ultimately benefiting shareholders and customers alike.
Key Takeaways
- Only half of surveyed banks have implemented VaR limits or plan to do so soon.
- Most banks lack a strong risk management group with permanent training and knowledge updates.
- Stress testing procedures vary in sophistication across banks.
- Regular backtesting is essential for ensuring the accuracy of VaR estimates.
Implications for Banks
Adopting Risk-Adjusted Performance Measurements
Adopting risk-adjusted performance measurements can help ensure that end-of-year bonuses are aligned with risk-taking activities.
Investing in a Strong Risk Management Group
Investing in a strong risk management group with ongoing training and updates can lead to improved risk assessment and management.
Regular Stress Testing and Backtesting Procedures
Regular stress testing and backtesting procedures are essential for ensuring the accuracy of VaR estimates.
Call to Action
Banks must prioritize the adoption of risk-adjusted performance measurements, regular backtesting procedures, and investment in a strong risk management group. This will enable them to accurately assess and manage their risks, ultimately benefiting shareholders and customers alike.