Subprime Crisis Exposes Deficiencies in Risk Management Among Financial Institutions Globally

New TowerGroup Research Explores ‘Multifunctional Integration’ as the Positive Side of Risk

NEEDHAM, Mass., Dec. 3 /PRNewswire/ — The recent crisis in the subprime lending market exposed structural deficiencies in the financial system globally, particularly around the area of risk management. New research from TowerGroup finds that many financial institutions continue to view and manage risk in the traditional fashion — as a threat that may bear a negative impact in the future. Lacking a more comprehensive, proactive and integrated view of risk, many institutions mandate narrowly-focused risk control and mitigation strategies, and then overreact when unforeseen or damaging events arise.

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TowerGroup finds that in today’s changing world, most financial services institutions are predominantly risk averse. But as the balance between product mix and capital adequacy shows greater variance, business models are becoming noticeably polarized — with progressive institutions understanding and managing risks and financials more holistically.

“Risk analyses that are ‘siloed’ in one area of an institution may exaggerate the danger attached to new products or services, thus leading institutions to stifle innovation and forgo growth opportunities,” said Guillermo Kopp, executive director and global research fellow at TowerGroup and author of the research.

“On the other side of the coin, poor integration of risk management across an organization masks the interdependencies of risk and financial indicators — potentially exposing financial institutions to severe losses. Unfortunately many institutions only become aware of their risk management pitfalls once a lapse in controls or unforeseen interdependencies between events causes a major business problem,” he added.
    Research highlights include:

    — The recent subprime lending crisis served as a harsh reminder that
       financial risks (i.e., credit and liquidity) are deeply and globally
       interdependent.
    — Organizations must work to integrate the management of financials with
       operational and other risk types — such as brand damage, business
       continuity, disruption of the supply chain, and geopolitical unrest.
    — Beyond defending against threats to the organization, a more integrated
       approach to risk management can drive other business and client-centric
       benefits, including:  improved quality and transparency of information;
       relationship pricing; process simplicity and efficiency; more effective
       decision making; and overall resilience.
    — The heads of financial institutions must understand the changing
       variables in today's interconnected world and continually watch for
       early warning signs.  Proactive leadership, in which chief financial
       officers and risk managers play key roles, is critical to achieving
       integration and sustaining competitive advantage.
Kopp noted that a reactive position based on lagging indicators and reports is becoming completely inadequate to steer organizations through today's increasingly demanding marketplace. “Achieving effective functional integration inside and outside a financial institution requires a tough and long transformation journey. Success factors include a determined leadership team and a strategic road map that ‘staggers’ changes in organization, process, and technology.”

The new TowerGroup research report, titled “Multifunctional Integration: The Positive Side of Risk,” is available to qualified members of the press for review. To request a copy or arrange an interview with one of the authors, please contact Rachael Adler at +1.212.455.8037 or radler (at) cooperkatz (dot) com. Those interested in purchasing a copy of any TowerGroup report or subscribing to a TowerGroup research service may call +1.781.292.5200 or email service-info (at) towergroup (dot) com.

About TowerGroup: TowerGroup is the leading research and advisory services firm focused exclusively on the financial services industry. A respected source for trusted information and advice, TowerGroup brings many of the world's leading financial institutions, technology companies, and professional services firms a deeper understanding of the business and technology issues impacting their organizations. Headquartered near Boston in Needham, Massachusetts, and with offices in North America and Europe, TowerGroup serves a global client base. Visit http://www.towergroup.com for more information.
    Contacts:
    Rachael Adler                       Jorge Lavina
    radler (at) cooperkatz (dot) com               jlavina (at) cooperkatz (dot) com
    +1-212-455-8037                     +1-212-455-8041
SOURCE TowerGroup

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