Banks must move into integrated risk mgmnt systems: Crisil

With the emphasis on risk management at banks growing globally, there is an urgent need for banks to integrate risk management processes with business and operating models, says rating agency Crisil. Along with these, banks will also have to significantly enhance its stress testing capabilities and also increase their know-how on risk management related data requirements and analytics, the agency said in a report.

"The risk management processes at banks need to be better integrated with their business and operating models. For this, risk management needs to be viewed as a key part of strategy and operations and go well beyond merely being a compliance exercise," the report said. Besides, there is a need to incorporate risk-based capital performance measures and stress testing more centrally into business decision-making processes, it said. Also Read: Bankers pitches for rate cut by RBI in Dec 18 policy review Also, banks need to do more in the area of integrated stress testing, including market, credit, liquidity and operational stress testing, besides testing their portfolios. "Stress testing also needs to be forward-looking, with several tail risk scenarios and take into account the interconnectivity of the global financial systems and economies," it said. The outcome of integrated stress testing scenarios should be a key input for the management and boards of banks, while deciding on their risk appetite, capital and liquidity planning, the report said. "There is a growing need for strengthening risk management by improving data availability and risk analytics. Lack of consistent and complete data prevents accurate risk computation," the report said. Regulators like the US Federal Reserve disregard stress testing submissions of banks if they are not based on robust data - in such cases, the Fed uses its own assumptions based on industry averages, the report said. "Despite past failures there is still an over-reliance on traditional measures of risk such as value-at-risk (VaR). VaR is not useful in planning for extreme events as it measures the maximum possible loss within standard operating conditions. Banks need to emphasise newer techniques such as reverse stress tests," the report said. It further said that reverse stress tests can help banks identify a range of adverse circumstances which could cause business failure and help develop mitigation plans. "It is also important that the limitations of models being used at the banks are fully understood," the report added.