US banks beat European and Asia-Pacific counterparts in managing risk

European and Asia-Pacific banks lag behind their North American rivals in using risk management tools to generate shareholder value, according to research from London-based management, systems and technology consulting firm, PA Consulting Group.

The research shows how banks worldwide are measuring and managing risk, and what benefits they have gained from this. The results revealed wide differences in approach and performance benefits, with North American banks having more sophisticated risk management tools than their European and Asia-Pacific rivals.

Over 60% of North American banks were found to have implemented portfolio modelling for credit risk, compared with around 40% of the European and Asia-Pacific banks. Half of North American banks were found to have implemented operational risk indicators, compared with under 30% of European and Asia-Pacific banks. The research also found that North American banks make better use of their risk tools than European and Asia-Pacific banks, with 83% of North American banks using credit risk tools in deal pricing compared with 44% of European banks and 63% of Asia-Pacific banks.

PA Consulting concludes that European and Asia-Pacific banks should focus on the wider and deeper application of their existing credit, market and operational risk management tools within their organisations, before considering the development of more sophisticated tools.

Risk management is at the top of most banks' agendas, but they are failing to reap its full benefit, said Eddie Niestat, head of financial services at PA Consulting. “Credit, market, and operational risk tools are not being applied to maximum effect in front-line risk management functions such as deal pricing and deal structuring," he said.

The analysis reflects the position in Spring 2002, with responses from over 100 banks, ranging in size from regional banks with assets of $2 billion to world leaders with assets of over $500 billion.