Banking risk management: 11 ways to improve risk forecasting in 2011

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Ernst & Young says more robust risk forecasting can help banks identify actionable business decisions and enhance banking risk management.

Banks should focus on a risk-based financial forecast, which is an overall balance sheet forecast for multiple risk scenarios.

Ernst & Young says that, while the banking industry has made significant changes to risk management procedures, more enhancements are needed in the area of risk forecasting.

“Banks should focus on a risk-based financial forecast, which is an overall balance sheet forecast for multiple risk scenarios,” said Hank Prybylski, Ernst & Young Global Financial Services Risk Management Leader. “Ultimately this risk forecast needs to help banks identify actionable business decisions.”

Prybylski said banks need upgraded information sources to feed the forecasts, as well as enterprise-wide risk systems to better assess the possible impact of market events.

He recently sat down with Risk magazine to discuss the 2010 Ernst & Young Global Bank Risk Management Survey, which found that more than half of respondents (55%) had some form of forecasting capabilities within their companies. However, the survey showed that only 27% described their banks as having formal, enterprise-wide forecasting processes in place.

Ernst & Young cites 11 ways banks can improve and upgrade their risk forecasting:

1. Establishing uniform modeling standards across the bank.
2. Varying stress-testing methodologies appropriate to the bank’s risk appetite, level of sophistication and current and planned operations.
3. Integrating scenarios in order to cover more than one type of risk.
4. Using broad analytical metrics aligned with how risk is managed.
5. Extending time horizons of scenarios and forecasts.
6. Complementing weaknesses of Value at Risk (VaR) by using a wider variety of methods.
7. Using more worst-case scenarios.
8. Using consistently reliable and appropriate data in their models.
9. Requiring more accountability around forecasting of loss levels and capital utilization.
10. Using historical data but placing more emphasis on the last 6-12 month period, which is more indicative of current customer behavior.
11. Instituting more business-line-specific, bottom-up stress testing around discrete portfolios of risk, particularly those with tail risks attached.

Watch video of Ernst & Young’s Hank Prybylski discussing risk forecasting and other risk management challenges faced by the banking industry.

About the Ernst & Young Global Banking & Capital Markets Center
In today's globally competitive and highly regulated environment, managing risk effectively while satisfying an array of divergent stakeholders is a key goal of banks and securities firms. Ernst & Young brings together worldwide teams of professionals to help you achieve your potential –teams with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. Ultimately, it enables us to help you meet your goals and compete more effectively. It's how Ernst & Young makes a difference.

About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

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Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

This news release has been issued by Ernst & Young LLP, a member firm serving clients in the US.


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