Tag Archives: Economist Intelligence Unit

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Banks’ Inability to Protect Info “Almost Shocking”

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Does the financial industry think it’s invincible? Or is the industry as a whole innocently ignorant as to how to keep up with certain emerging risks?

For example, Citigroup became the victim of a cyber thieves recently when banking giant realized hackers infiltrated their computer system and stole personal information from more than 200,000 credit card holders, making it one of the largest direct attacks on a major bank. As the New York Times points out:

Even more striking is that similar data breaches have been occurring for years — and the financial industry has failed to prevent them. Details remain scarce, but the disclosure of the Citigroup breach on Thursday quickly turned into a debate on whether the banks and major credit card companies had invested enough money to safeguard the personal information of their customers. “They’re not at all on top of it,” said Avivah Litan, a financial security analyst at Gartner Inc. “It’s almost shocking.”

Shocking indeed.

How, in 2011, are some of the world’s largest financial institutions unaware of the omnipresent threat of hackers? Though recent data breaches involving Sony, Amazon and Google have rightfully raised concerns regarding internet “security,” the Citigroup situation raises some serious red flags.

It raises a question as to whether flames of the ongoing cyber-war are leaping to financial banks. If so, prompt actions to combat the cyber-crime must be taken by both governments and private companies.

Writing about the overconfidence that banks exhibit reminds me of my post from yesterday in which I reference the Economist Intelligence Unit’s report that stated one of the many failings within the discipline of risk management is:

2. Finance executives remain unaware of risks

According to the survey, “Compared to colleagues in legal, risk and compliance functions, finance professionals are far more likely to say that their organizations haven’t suffered from significant risk or compliance failures.” This is yet another surprising finding since the financial department is considered one of, if not the, most important department in an organization, considered the oxygen to the life of a company. If they are operating with the mindset that their company is perfect, either they’re not being true to themselves or they honestly cannot see failures. Both scenarios are scary.

Though the above refers to finance executives in any industry and the Citigroup data breach involves one company within the banking industry, the idea remains the same: the severity of data breach risks is not being acknowledged among most companies — most of all, among those companies and executives dealing with money.

A Surprising Study from the Economist Intelligence Unit

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Just when you think the discipline of risk management is making headway in the boardrooms of large corporations across numerous industries, a report surfaces that makes you think otherwise.

I’m referring to a research report by the Economist Intelligence Unit (EIU) titled Ascending the Maturity Curve: Effective Management of Enterprise Risk and Compliance.

The report compares perception with reality, exposing the discrepancies between how executives view their risk mitigation capabilities and what they are actually doing.

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The research is based on a worldwide survey of 385 senior executives from the finance, risk, compliance and legal functions, and a series of in-depth interviews with executives familiar with risk and compliance within their organizations.

Some of the key findings from the report:

1. Chief risk officers are not earning the respect they should

The appointment of a CRO has become more common in companies after the Basel Accord and Sarbanes-Oxley, and even more so after this latest recession. Though the awareness of CROs and their functions has been on the rise, their contributions are not recognized as they should be. Surprisingly, the EIU research finds that just 26% of those surveyed felt the CRO was “essential in terms of achieving business goals.”

2. Finance executives remain unaware of risks

According to the survey, “Compared to colleagues in legal, risk and compliance functions, finance professionals are far more likely to say that their organizations haven’t suffered from significant risk or compliance failures.” This is yet another surprising finding since the financial department is considered one of, if not the, most important department in an organization, considered the oxygen to the life of a company. If they are operating with the mindset that their company is perfect, either they’re not being true to themselves or they honestly cannot see failures. Both scenarios are scary.

3. Most executives wrongly assume they’re earning an “A”

It could be seen as confidence overload among top executives — almost half of those surveyed said their company’s practices are consistent with the best in the industry. The EIU references the Lake Woebegone effect — or when the vast majority of people think they’re above average.

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This is never a good attitude to have when practicing risk management, a discipline which, among other things, means thinking of everything that could go wrong, will, and working on a plan to mitigate such risks. Over-confidence is never a good attribute for risk management.

The report also covers the lack of consistent policies on business practices, learning from failures, knowing a company’s risk appetite and which two functions are most averse to risk.

Though not a very optimistic report, we must not let such research bring us down. Rather, we should use them for insight, instruction and inspiration.

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Survey Says? Risk Management Raises Profitability

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A new report from the Economist Intelligence Unit and Oracle Financial Services sheds further light on the elevation of risk management since the financial crisis. The general conclusion is similar to the one we have been hearing ad naseum since a failure of risk management tanked the global economy.

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As stated in “Transforming the CFO Role in Financial Institutions:  Towards Better Alignment of Risk, Finance and Performance Management” (PDF):

In such a challenging environment, financial institutions must now devise a sustainable growth strategy and be better protected against new or emerging risks. To do so, many finance departments are recasting their business processes in an effort to provide better access to information for internal decision-making, risk management, financial reporting and regulatory compliance.
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Blah blah blah. Same ol’, same ‘ol. Rhetoric and platitudes.

Right?

Maybe not.

This report, in addition to re-stating the need for better risk and finance alignment is actually speaking about evidence directly rooted in the bottom line. The execs surveyed are reporting that financial firms are more profitable when these two departments are in sync.

Financial institutions that benchmark themselves well on aligning their risk and finance functions also say they are doing better financially. Among survey respondents, of those who rank themselves much better than their peers at alignment between risk and finance, 60% are also much better at financial performance and 92% are above average. The equivalent figures for those who are average or worse at alignment are 8% and 32% respectively. The benefits are both specific, such as identifying potentially profitable clients, and general, such as providing a greater understanding of the global context in which major strategic decisions are made.

Those numbers seem substantial.

And this is not just a reality in 2011; this was the case all along. Those firms that prioritized risk management the most — not just rhetorically, but by paying big bucks for talented risk managers with decision-making insight — fared much better in 2008 than those that didn’t.

Research shows that at the 15% of US banks where the chief risk officer (CRO) was among the five highest-paid executives in 2006, the proportion of total assets made up by mortgage-backed securities at the time of the crisis was one-fortieth that of banks where the CRO was less well paid.

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There is even a correlation between higher CRO pay and lower stock volatility.

One-fortieth. That’s 1/40th. Or 2.5% if you prefer.

So you’re telling me that companies that committed to paid risk managers who they valued as decision makers to foresee, navigate through and mitigate pitfalls did much better in avoiding risks than those that didn’t? You don’t say?

For the past three years, we have repeatedly been saying that if this financial meltdown isn’t enough to move the needle on pushing risk management up the corporate hierarchy, nothing will be. But as more and more insight like this in unveiled, it’s hard to believe that companies can continue to ignore the obvious: risk management saves — and makes — money.