Banks not effectively applying risk tools, says report

Only 31% of banks surveyed – from a pool of 106 – use credit risk tools when deal structuring, said PA in a report entitled Risk-based management in the banking sector. PA also believes that banks could significantly improve their shareholder returns by using their risk management tools to make “better” business decisions, such as risk-adjusted performance measures for staff remuneration.

“Credit risk tools are mostly being used to set prices and for accept/reject decisions, rather than to find an optimal structure for the deal,” said PA.

PA added that many banks are under-utilising their risk tools for the allocation of economic capital. It found that only 56% of banks that took part in the survey used credit risk tools for capital allocation, while 55% use market risk tools and 23% operational risk tools. This is despite increased regulatory and industry focus on risk measurement and capital allocation, particularly operational risk.

The report is an extension and update of a survey that PA conducted last year in response to client interest in Basel II, the proposed new set of rules regarding how much capital large international banks will have to set aside to guard against risk. “If you look at what happened with Basel, with delays and more details coming out, our clients were asking what banks are doing now,” said Eddie Niestat, a senior partner with PA consulting.