Strategic risk management: practice in systemically important banks

Official inquiries into the failures of several large banks during the global financial crisis showed that strategic risk is one of the greatest risks facing any firm. But do other banks, especially those designated systemically important banks (SIBs), manage their strategic risks any better than failed companies, such as Lehman Brothers or the taxpayer-owned Royal Bank of Scotland? This paper describes the results of a study into the practice and governance of strategic risk management in 18 of the world’s largest banks, all SIBs. The study found that these banks do not appear to pay sufficient attention to this critical area, despite banking regulators identifying strategic risk as warranting additional and intrusive supervision. Far from having clear strategies for the future against which management can be measured and remunerated, most banks in the study still appear to be on “auto-pilot”, merely doing today what they did yesterday which generally happens to be what the rest of the industry is also doing. The majority of these banks are acting as if they are part of a “herd”, betting on the same business model. In light of the systemic failures that occurred during the GFC as a result of banks loading up on the same risks, regulators should consider whether more diversity, or at the very least a clearer understanding of exactly where important banks are headed, might improve the overall stability of the financial system.