EY's 2016 Global Banking Risk Management Survey

EY survey found banks are under considerable pressure from investors on ROE – investors pressing for cost reductions and business model change

While banks have materially strengthened their risk management approach from the board level down across risk, compliance and controls since the financial crisis, the industry is still searching for the appropriate blueprints to establish effective risk accountability across the three lines of defense. This is according to EY's 2016 global banking risk management survey, "A set of blueprints for success."


The global survey of banks carried out by EY (No. 3 on the DiversityInc Top 50 Companies for Diversity list) and the Institute of International Finance (IIF) follows the industry's progress in improving risk management by surveying senior risk executives. This year, 67 banks from 29 countries participated in the survey. This includes 23 of the 30 institutions described as "global systematically important banks" (G-SIBS).

Tom Campanile, Partner, Financial Services Office, Ernst & Young LLP, says:

"Banks have made considerable strides in terms of risk management enhancements since the crisis. However, regulations are still changing and industry approaches on emerging or evolving areas such as non-financial risks and increased IT security threats are still maturing. This suggests a long road ahead for banks. Finding a sustainable risk management operating model that will be flexible through this current market environment will be essential to success."

Although the survey highlighted that significant progress has been made so far, banks may be halfway through what could be a 15-year journey of substantial work to enhance risk management processes. Additionally, increased investor pressure to achieve higher, stable returns have resulted in banks converging toward an industry norm of three-year ROE targets of 10 percent to 15 percent across G-SIB and non-G-SIB banks, forcing banks to adapt their business models to meet these targets.

Andrés Portilla, Managing Director of the Regulatory Affairs Department at the IIF, says: "Banks are still under huge pressure on different fronts, and the risk management function is evolving rapidly to cope with the changes in the economic and regulatory environments. As this report shows, it is about embedding the concept of risk throughout all the processes and business of the organization, for which a period of regulatory stability is essential."

EY and the IIF have also identified the continued significance of non-financial risks that pose major financial strains on the business. Specifically, focus on a wide range of conduct areas has increased – money laundering (increased to 72 percent from 52 percent in 2015) and sanctions (increased to 52 percent from 30 percent in 2015) have moved significantly up the agenda. Cybersecurity has surged with almost half of respondents (48 percent) highlighting cybersecurity as one of the three most important risks for their board over the next year.

Effective implementation of the three lines of defense blueprint

According to the survey, banks have greatly stepped up their efforts to make a fully functioning three-lines-of-defense approach to risk management work, but there is still no agreed blueprint within the industry on the balance of responsibilities across the first and second lines – with many firms working to enhance the responsibility of the first line.

More than 60 percent of banks highlighted that they are currently changing their three lines of defense model. Top reasons for doing this includes significant focus on the first line including:

- Making the first line accountable for end-to end risk (38 percent)

- Making the first line more clearly accountable for non-financial risk (28 percent)

- To make the first line more clearly accountable for financial risk (27 percent)

Banks are also looking at the effectiveness and efficiency of the second line functions – in particular better technology and more advanced data analytics are essential, as are properly implemented centralized teams for common, repeatable tasks (such as testing). Such approach would allow firms to deliver the right risk outcomes cost-effectively.

Developing a working blueprint to address non-financial risks

The industry, and G-SIBs in particular, continue to focus on addressing non-financial risks more effectively. Banks recognize that they need the management of risk to be part of everyone's job, not just those in risk and control roles, and are testing and enhancing controls frameworks.

Significant changes have been made to improve the management of non-financial risk. Banks are attempting to reduce non-financial risk by reducing complexity of products (57 percent); exiting products (63%); improving employee training (67 percent) and strengthening risk culture and employee behavior by enhancing messaging and tone from the top (90 percent). Importantly, they are also enhancing their forward looking and analysis of intrinsic non-financial risks and embedding non-financial risk into other risk management initiatives.

In addition to addressing conduct issues, banks are focusing on three main areas: operational risk, cybersecurity and vendor risks. Firms report clear focus on operational risk (with 77 percent of them reporting devoting more time to it as compared to last year). Cybersecurity has shot up to the top of the CRO agenda, ranking second (51 percent) in the list of top five concerns over the next year.

Navigating toward a blueprint for a sustainable, long-term business model

The report highlights the combined effect of lower profitability because of economic conditions and low interest rates and higher regulatory capital on ROEs. Respondents say their investors are pushing for higher ROEs (82 percent) and reduced costs (79 percent). Banks express major concerns about the regulatory proposals to increase capital further and reduce risk sensitivity. Overall it would have the effect of making yet more areas of core lending activity unprofitable.

- The capital, liquidity and leverage changes under Basel III have led banks to rethink their business model as a large percentage of G-SIBs (83 percent) and non-G-SIBs (67 percent) are evaluating asset portfolios. Over 48% of respondents are exiting business lines and 27 percent are exiting countries.

- It is projected that the cumulative reforms to the Basel III capital framework – often referred to as "Basel IV" – could have a particularly negative impact on banks. The survey highlights that changes to internal ratings-based (IRB) models are a major concern as 63 percent of respondents highlighted that the models could change the economics of some areas of business. Concerns also exist regarding fundamental changes proposed on the treatment market and operational risks.

- Additional changes including the standardized measurement approach (SMA) for operational risk will drive up capital, especially for G-SIBs – with 67 percent expecting a significant or moderate increase; and the fundamental review of the trading book (FRTB) will greatly impact trading and investment banks.

View the report online at ey.com/bankingrisk. Follow us on Twitter: @EY_Banking

Middle-market Companies Seizing Growth by Embracing AI, Diverse Talent Pools and Sweeping Regulation Over Next 12 Months

EY survey shows 87% of middle-market companies plan revenue growth of more than 6% this year, significantly outpacing GDP forecasts

Originally Published by EY.

Middle-market companies across the globe are significantly more optimistic about business conditions and opportunities than last year, according to the findings of the annual EY Growth Barometer released at the EY World Entrepreneur Of The Year Forum. Growth prospects for all major economies are finally improving in 2018, with International Monetary Fund GDP forecasts currently at 3.9% for the year. Amid this positive background, business leaders are bullish about revenue growth.

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Regulatory Complexity is the Greatest Barrier to Widespread Blockchain Adoption, While Regulatory Changes are the Primary Driver of Broader Integration, According to EY Poll

Organizations are making an active effort to integrate blockchain into their business functions as they look to reap the benefits of the technology, with 60% expecting the financial/professional services industry to see the most blockchain breakthroughs in the next two years.

Originally Published by EY.

Regulatory complexity is having a significant impact on widespread blockchain adoption, according to an EY poll of senior professionals who attended the EY Global Blockchain Summit in New York. Sixty one percent see regulatory complexity as the biggest barrier to widespread adoption, followed by integration with legacy technology (51%) and a lack of general understanding of blockchain's capabilities (49%).

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Originally Published by National Organization on Disability.

On November 1st, the National Organization on Disability held our Corporate Leadership Council Fall Luncheon and Roundtable. Hosted at Sony's New York offices, the event centered on the topic of mental health in the workplace.

Members of our Board of Directors and executives from nearly 40 companies held a candid conversation, heard from business leaders, and participated in an insightful Q&A where successful strategies were discussed to accommodate and support employees with mental illness in the workplace.

"Mental illness is the single biggest cause of disability worldwide," said Craig Kramer, a panelist at the event and Chair of Johnson & Johnson's Global Campaign on Mental Health. "One out of four people will have a clinically diagnosable mental illness at some point in their lives," he continued. Another 20 to 25% of the population will be caregivers to loved ones with a mental illness.

The costs are staggering. "In the coming decades, mental illness will account for more than half of the economic burden of all chronic diseases, more than cancer, diabetes, and chronic respiratory diseases combined…. It's trillions of dollars," said Kramer.

From an employer's perspective, the need for a successful strategy to deal with mental illness in the workplace is clear. But what are the most effective ways to confront this challenge? Roundtable participants discussed a wide range of ideas and success stories aimed at de-stigmatizing mental health and incorporating the issue into wider conversations around talent, productivity, and inclusion.

6 KEY TAKEAWAYS ON MENTAL HEALTH IN THE WORKPLACE:

  1. Be empathetic. "The most important workplace practice [with respect to mental health] is empathy," said NOD President Carol Glazer. Empathy is critical for normalizing conversations about mental health, but also for maximizing productivity. "A feeling of psychological safety is important," said Lori Golden, a panelist and Abilities Strategy Leader for Ernst & Young; and this sense of safety requires the empathy of colleagues to flourish.
  2. Tell stories. "Nothing is more activating of empathy than for people to share their powerful stories," said Dr. Ronald Copeland, NOD Board member and Senior Vice President of National Diversity and Inclusion Strategy and Policy and Chief Diversity and Inclusion Officer for Kaiser Permanente. Copeland's organization partners with the renowned nonprofit, Story Corps, to capture the stories of Kaiser Permanente employees, and also provides a platform on the company intranet for employees to communicate in a safe space. Both Craig Kramer and Lori Golden also shared examples of how their companies provide opportunities to share their stories and "start the conversation, break the silence," as Kramer put it.
  3. Model from the top. Carol Glazer received a standing ovation at the luncheon for her account of her own experiences with Post-Traumatic Stress Disorder (PTSD). This type of executive-level modeling sends a powerful message that a company is committed to improving mental health for all employees. Lori Golden shared how EY had experienced great success with a program where top-level managers host office-specific events and share stories of mental illness or addiction that they are personally connected to – either about their colleagues or loved ones or, in a surprisingly high number of instances, about themselves. Senior leadership setting the example conveys that this is a forum in which employees can feel comfortable sharing.
  4. Communicate peer-to-peer. "We all know that there's greater trust of our own peers than there is of the organization," said Lori Golden. So to build trust, EY "took it to the grass roots," creating formal opportunities for employees to have conversations about mental health and asking other ERGs to co-sponsor these events. Craig Kramer also noted that Johnson & Johnson had simply folded mental health issues into their global disability ERGs, eventually building the world's second-largest mental health ERG by piggy-backing on existing infrastructure and leveraging existing connections.
  5. Be flexible. Accommodating [the fact that people live busy, complex lives] gets you better buy-in…and keeps production pretty high," suggested Dr. Copeland. A representative from one Council company concurred, explaining how their company has recently instituted a new policy of paid time off for caregivers on top of federally-funded leave. "Being in a culture in which we measure what you produce and not whether you show up in person all day, every day, and where if you can't be there, you negotiate how the deliverables will get done and in what time frame…is immensely helpful to people who themselves have mental illness issues or addiction or are caring for those who do and may need some flexibility," summarized Lori Golden.
  6. Build a trustworthy Employee Action Plan. Many employees do not access or even trust their organization's internal resources. According to Craig Kramer, the percentage of calls placed to most company Employee Action Plans (EAPs) regarding mental health is "in the low single digits," while "if you look at your drug spend, you'll find that around 50% is [related to] mental health." The people answering those calls must be trained in mental health issues, and employees also need to be assured that EAPs are truly confidential.

While revealing and accommodating mental illness remains a massive challenge in the workplace and beyond, a number of successful strategies are emerging for tackling this challenge – many of them pioneered by companies in NOD's Corporate Leadership Council.

EY: Women CEOs’ Growth Ambitions Significantly Outpacing the Market, Despite Their Ongoing Challenges in Accessing Capital

The EY survey, based on views of CEOs from middle-market companies across the globe, showed that this optimism is in line with improving business conditions internationally.

Originally Published by EY.
  • 30% of female-led companies are targeting growth of more than 15% in next 12 months, compared with just 5% among rest of market
  • 52% of women-led companies have no access to external funding, compared to 30% of male-led companies
  • 17% of respondents think that access to capital is the biggest barrier to growth

Despite encountering more obstacles to accessing capital, female-run businesses are targeting more ambitious growth margins than male-led companies, according to the EY survey Is the x chromosome the x factor for business leadership?, unveiled at the EY Entrepreneurial Winning WomenTM Asia-Pacific and Japan conference this week in Tokyo. The survey, based on views of CEOs from middle-market companies across the globe, showed that this optimism is in line with improving business conditions internationally.

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