Taking the Risk Out Of Financial Businesses

The economic recession, the events of Sept. 11 and recent corporate scandals, have forced financial businesses to pay greater attention to risk management, to the point of actually giving risk-adjusted profit analysis to investors and analysts, according to a new study published by PricewaterhouseCoopers and the Economist Intelligence Unit (EIU).

The survey entitled, Taming Uncertainty: Risk Management for the Entire Enterprise, says that financiers are usually very aware of immediate risks involving credit quality and market volatility but they tend to ignore low-probability, high -impact events.

Some organizations, such as JP MorganChase and UBS, are developing procedures to deal with risk and factor it into regular decision-making, according to the survey. These rules include a zero tolerance policy for compliance breeches, regular risk management audits and basing performance and reward bonus schemes on revenue instead of stock options.

The survey also suggested banks set aside money in their budgets to cover operational risk--a risk that results from inadequate or failed internal processes or external events. Employee salaries can also be restructured to ensure risk management compliance, i.e. awarding bonuses to people who comply with risk procedures or alert company executives to potential new risks.

To create a "world-class risk management culture," the report sites certain rules that must be followed: Equal attention should be paid to both quantifiable and unquantifiable risks; risks must be identified and reported as much as possible; risk management should become everyone's responsibility; risk managers must have the ability to crack down and veto projects they feel are too risky; and companies should accept uncertainty but monitor risk managers.

Finally, the company's risk level must be clearly understood by all employees and employers.