9ème Édition de L'etude Deloitte Global Risk Management

Global risk management
survey, ninth edition

Operating in the new normal:
Increased regulation and heightened
expectations
Global risk management survey, ninth edition
About the editor

Edward Hida
Edward Hida is the global leader of Risk & Capital Management and a partner in the Governance,
Regulatory & Risk Strategies practice of Deloitte & Touche LLP, where he leads Risk & Capital
services. He has substantial experience consulting on a variety of financial risk management and
capital markets issues, and has completed a wide range of risk management consulting assignments
for US and global financial services organizations.
Acknowledgements
This report is a result of a team effort that included contributions by financial services practitioners
from member firms of Deloitte Touche Tohmatsu Limited around the world. Special thanks
are given to Bayer Consulting for administering the survey and their assistance with the
final document.
In addition, the following individuals conducted analysis and provided project management,
editorial, and/or design support:
Andrew Brooks
United States
Deloitte & Touche LLP
Stuart Shroff
United States
Michelle Dahl
United States
Deloitte Services LP
Jeanne-marie Smith
United States
David Merrill
United States
Deloitte Services LP
About Deloittes financial services industry practice

A recognized leader in providing audit, tax, consulting and financial advisory services to the
financial services industry, Deloittes clients include banks, securities firms, insurance companies,
investment managers, and real estate services companies from around the world. Over 35,000 practitioners, including 4,400 partners, are dedicated to serving financial services industry clients across
more than 40 member firms in the Deloitte network.
Operating in the new normal: Increased regulation and heightened expectations
Contents
Foreword|2
Executive summary|4
Introduction: Economic and business environment|6
Risk governance|15
Enterprise risk management|22
Economic capital|26
Stress testing|28
Sector spotlight: Banking|31
Sector spotlight: Insurance|35
Sector spotlight: Investment management|39
Management of key risks|46

Credit risk|47
Market risk|48
Liquidity risk|48
Asset liability management|49
Operational risk|49
Regulatory risk |51
Risk management information systems and technology|53

Conclusion |55
Endnotes|57
Foreword
Dear colleague,
E are pleased to present the ninth edition of Global risk management survey,
the latest installment in Deloittes ongoing
assessment of the state of risk management
in the global financial services industry. The
survey findings are based on the responses of
71 financial institutions from around the world
and across multiple sectors, representing a total
of almost US$18 trillion in aggregate assets.
We wish to express appreciation to all the survey participants for their time and insights.
Financial institutions continue to make
progress in many areas of risk management.
Boards of directors are devoting more time to
risk management and most boards are addressing key issues such as approving the risk appetite statement and aligning corporate strategy
with the organizations risk profile. Having a
chief risk officer position and an enterprise risk
management program is becoming prevailing
practice. In the area of capital adequacy, almost

all the banks surveyed that are subject to Basel
III requirements already meet the minimum
capital ratios. Further, the tidal wave of regulatory developments ushered in by the global
financial crisis shows no signs of abating,
especially for large institutions deemed to be
systemically important.
Risk management must respond to the
new normalan environment of continual
regulatory change and ever more demanding expectations. In the United States, the
Federal Reserve has introduced the Enhanced
Prudential Standards and the Comprehensive
Capital Adequacy Review. In Europe, the
European Central Bank assumed responsibility
for the prudential supervision of the regions
banks, and has conducted its comprehensive
assessment asset quality review and stress tests.
In addition, a new European Union Capital
Markets Union is under development. The
Basel Committee for Banking Supervision
is introducing higher standards for capital

adequacy and liquidity. The Solvency II capital
adequacy regime is due to become effective
for European insurers at the beginning of
2016, while the International Association of
Insurance Supervisors is developing a global
insurance capital standard. These are just a few
of the many new regulatory initiatives underway around the world.
Two emerging risks in particular are receiving increased attention from financial institutions and their regulators. Cyber attacks on
corporations, including financial institutions,
have increased dramatically in the last few
years, requiring institutions to strengthen the
safeguards for information systems and customer data. Regulators are more closely scrutinizing how institutions manage conduct risk
and the steps they are taking to create a risk
culture and incentive compensation programs
that encourage ethical behavior.
Financial institutions must not only comply

with these new regulatory requirements and
priorities, they also need the flexibility to
respond to the next round of regulatory developments that is likely over the coming years.
This will require strong risk management capabilities, robust risk infrastructures, and timely,
high-quality risk data that are aggregated
across the organization.
We hope that this comprehensive examination of risk management at financial institutions around the world provides you with
helpful insights into todays challenges and
stimulates your thinking on how to further
enhance your organizations risk management.
Sincerely,
Edward T. Hida II, CFA
Global leader, Risk & Capital Management
Global Financial Services Industry
Deloitte Touche Tohmatsu Limited
Executive summary
HE global financial crisis was the catalyst

for an era of sweeping regulatory change
that shows little sign of abating. Across the
financial services industry, regulatory requirements are becoming broader in scope and
more stringent.
After new regulations are enacted, it can
take years before their practical implications
become clear. Although the Dodd-Frank
Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act) in the United States
and Basel III were introduced several years
ago, their rules are still being finalized.
New regulatory developments include the
US Federal Reserves Enhanced Prudential
Standards (EPS), the European Central Bank
(ECB) becoming the prudential supervisor
of Eurozone banks, a new Banking Standards
Review Council in the United Kingdom, and
Solvency II becoming effective for European
insurers in 2016.
The new regulatory landscape is placing
demands on financial institutions in such areas
as corporate governance, risk appetite, capital
adequacy, stress tests, operational risk, technology data and information systems, and risk
culture, to name only some areas of focus. As
institutions prepare to comply, they will need
the flexibility, in both their business models
and compliance programs, to respond to the
seemingly inevitable next round of reforms.
Deloittes Global risk management survey,
ninth edition assesses the industrys risk management practices and challenges in this period
of reexamination. The survey was conducted in
the second half of 2014 and includes responses
from 71 financial services institutions around
the world that operate across a range of financial sectors and with aggregate assets of almost
US$18 trillion.
Key findings
More focus on risk management by
boards of directors. Reflecting increased regulatory requirements, 85 percent of respondents
reported that their board of directors currently
devotes more time to oversight of risk than it
did two years ago. The most common board
responsibilities are approve the enterprise-level
statement of risk appetite (89 percent) and
review corporate strategy for alignment with the
risk profile of the organization (80 percent).
Broad adoption of CRO position. During
the course of this global risk management
survey series, the existence of a chief risk
officer (CRO) position has grown to be nearly
universal. In the current survey, 92 percent of
institutions reported having a CRO or equivalent position, up from 89 percent in 2012 and
65 percent in 2002. Although it is considered
a leading practice1 for the CRO to report to
the board of directors, only 46 percent of
respondents said this is the case, while 68
percent said the CRO reports to the CEO.2 In
a positive sign, 68 percent of respondents said
the CRO has primary oversight responsibility for risk management, an increase from
42 percent in 2012. Three responsibilities of
the independent risk management program
led by the CRO were cited by more than 90
percent of respondents: develop and implement
the risk management framework, methodologies, standards, policies, and limits; oversee risk
model governance; and meet regularly with
board of directors or board risk committees. Yet

only 57 percent of respondents said their risk
management program had the responsibility to
approve new business or products.
ERM becoming standard practice. It has
become a regulatory expectation for larger
institutions to have an enterprise risk management (ERM) program, and this is reflected
in the survey results. Ninety-two percent of
respondents said their institution either had an
ERM program or was in the process of implementing one, an increase from 83 percent in
2012 and 59 percent in 2008. Another positive
development is that among these institutions,
78 percent have an ERM framework and/or
ERM policy approved by the board of directors
or a board committee.
Progress in meeting Basel III capital requirements. Eighty-nine percent of
respondents at banks subject to Basel III or to
equivalent regulatory requirements said their
institution already meets the minimum capital
ratios. The most common response to Basel
IIIs capital requirements was to devote more
time on capital efficiency and capital allocation
(75 percent).
Increasing use of stress tests. Regulators
are increasingly relying on stress tests to assess
capital adequacy, and respondents said stress
testing plays a variety of roles in their institutions, including enables forward-looking assessments of risk (86 percent), feeds into capital and
liquidity planning procedures (85 percent), and
informs setting of risk tolerance (82 percent).
Low effectiveness ratings on managing
operational risk types. Roughly two-thirds of
respondents felt their institution was extremely
or very effective in managing the more traditional types of operational risks, such as legal
(70 percent), regulatory/compliance (67 percent), and tax (66 percent). Fewer respondents
felt their institution was extremely or very
effective when it came to other operational risk
types such as third party (44 percent), cybersecurity (42 percent), data integrity (40 percent),
and model (37 percent).
More attention needed on conduct risk
and risk culture. There has been increased
focus on the steps that institutions can take to

manage conduct risk and to create a risk culture that encourages employees to follow ethical practices and assume an appropriate level
of risk, but more work appears to be needed
in this area. Sixty percent of respondents said
their board of directors works to establish and
embed the risk culture of the enterprise and
promote open discussions regarding risk, and a
similar percentage said that one of the boards
responsibilities is to review incentive compensation plans to consider alignment of risks with
rewards, while the remaining respondents said
these were not among the boards responsibilities. Only about half of respondents said it was
a responsibility of their institutions risk management program to review compensation plan
to assess its impact on risk appetite and culture.
Increasing importance and cost of regulatory requirements. When asked which risk
types would increase the most in importance
for their institution over the next two years,
regulatory/compliance risk was most often
ranked among the top three, and 79 percent
felt that increasing regulatory requirements and
expectations were their greatest challenge. The
most important impact of regulatory reform
was noticing an increased cost of compliance,
cited by 87 percent of respondents.
Risk data and technology systems continue to pose challenges. Again in 2014, the
survey results indicated a need for continued
improvement to risk data and information
systems. Sixty-two percent of respondents said
that risk information systems and technology
infrastructure were extremely or very challenging, and 46 percent said the same about risk
data. Issues related to data quality and information systems were also considered by many
respondents to be extremely or very challenging in complying with Basel III (56 percent)
and Solvency II (77 percent), and in managing
investment management risk (55 percent).
Going forward, 48 percent of respondents were
extremely or very concerned about the ability of the technology systems at their institution to be able to respond flexibly to ongoing
regulatory change.
5
Introduction: Economic and

business environment
D
ELOITTES Global risk management

survey, ninth edition assessed the risk
management programs and challenges at 71
financial services institutions representing a
range of geographic regions, asset sizes, and
industry sectors. (See About the survey.) The
survey was conducted as regulatory changes
continued to sweep over the industry and amid
an uncertain outlook for the global economy.
Economic storm clouds

Although the US and UK economies
continued to grow, economies in the Eurozone
and Japan remained weak. Emerging markets,
especially China, are also growing more slowly
than in the past. The strength of the US dollar
is having major but unpredictable impacts
on many economies. By March 2015, the US
dollar had increased in value by 25 percent
compared to a basket of commonly used
international currencies since the US Federal
Reserve announced in 2013 that it would
phase out quantitative easing.3 As a result, debt
service has become an increasing burden for
companies outside the United States that have
borrowed in US dollars, while exporters in
these countries have become more competitive. Another important trend has been the
dramatic fall in energy prices. Lower energy
prices are expected to benefit many economies,
but will have adverse effects on certain oilproducing countries, such as Russia, and on
financial institutions with exposures to these
countries or to companies in or dependent on
the energy sector.
The US GDP grew 2.4 percent in 2014, and

the World Bank predicts the US recovery will
continue, with growth at 3.2 percent in 2015.4
Although the United States had its strongest
year for job growth since 1999, real wages have
not advanced.5 In 2014, average hourly wages
increased only 1.65 percent, roughly the same
as the inflation rate.6
The UK recovery has continued, with
growth of 2.8 percent in 2014, and a similar
pace is anticipated for 2015.7
The outlook is darker in other regions.
Although the Eurozone economies are no
longer contracting, GDP grew by only 0.9
percent in 2014 and is expected to expand by
1.1 percent in 2015.8 In January 2015, the ECB
launched a $1.25 trillion package of quantitative easing in an effort to prevent deflation
and stimulate growth.9 A new government was
elected in Greece in early 2015, promising to
end austerity policies and demanding forgiveness of debt by external creditors, renewing
concerns that the country may exit from the
euro. The economy in Japan was stagnant,
with no growth in 2014 and growth of only 1.2
percent anticipated in 2015.10
Emerging markets, especially China, are
not growing at the blistering pace they once
were, due to weaker demand from developed countries that has not been replaced by
demand from their internal markets. Growth
in the Chinese economy slowed to 7.4 percent
in 2014 and is predicted to decline further to
7.1 percent in 2015.11 Falling demand from
China is expected to have a negative impact
on commodity-producing countries such as
Australia, Brazil, and Russia.
Continuing regulatory reform

The focus of regulators on such issues as
capital adequacy, liquidity, operational risk,
governance, and culture is driving change
throughout the financial industry. The impacts
have been widespread as new requirements
continue to be proposed by regulators around
the world, even as the final rules to implement existing laws are still being written.
Complying with multiple, sometimes conflicting, regulatory requirements implemented by
different regulatory
authorities poses
a significant challenge for global
financial institutions.
Applicable to
US bank-holding
companies with $50
billion or more in
consolidated assets,
the Federal Reserves
Comprehensive
Capital Adequacy
Review (CCAR) has
among its objectives
to increase the likelihood that institutions have sufficient
capital to continue
operations throughout times of economic and financial stress.12
The CCAR also applies to larger foreign banks
operating in the United States.
Regulators have extended the scope of
CCAR to cover all the dimensions that could
potentially impact capital adequacy.13 Under
CCAR, the Federal Reserve reviews an institutions capital planning processes to assess
whether they are adequate to identify, measure,
assess, and control risks; incorporate strong
internal controls; and include effective oversight by the board of directors and management.14 The Federal Reserve has indicated that
it expects to continually raise its expectations
for CCAR, requiring banks to constantly
upgrade their capabilities.
In 2014, the US Federal Reserve announced

the final EPS covering banks with more than
$10 billion in consolidated assets and places
additional requirements on banks with assets
of $50 billion or more. These standards codify
regulatory requirements on risk management
topics including capital, debt-to-equity ratio,
liquidity, counterparty limits, risk governance,
stress testing, and early remediation. Many
financial institutions will need to enhance their
capabilities to meet these requirements.
The Federal Reserve also introduced EPS
for foreign banks
(FBOs) and for nonbank systemically
important financial
institutions (SIFIs).
Foreign banks that
have total global
assets of $50 billion
or more and also
have $50 billion or
more in US nonbranch assets are
required to hold
minimum levels of
capital, maintain
minimum levels
of highly liquid
assets, and conduct
stress tests, as are
US banks. Some foreign banks are building up
their US operations to comply, while others
are evaluating which of their businesses should
remain in the United States.
There have also been significant changes in
the European regulatory environment. These
include the ECB becoming the prudential
supervisor of Eurozone banks, the creation
of the Single Resolution Board to address the
resolvability of cross-border banks, and a new
Banking Standards Review Council in the
United Kingdom.15
The implementation of Basel III continues
with new requirements for capital adequacy
and liquidity. New requirements proposed by
the Basel Committee on Banking Supervision
(Basel Committee) for operational risk and
The focus of regulators

on such issues as
capital adequacy,
liquidity, operational
risk, governance, and
culture is driving
change throughout the
financial industry.
credit risk would replace existing standardized

approaches and bring these methodologies
closer to the advanced approaches. In October
2013, the Basel Committee issued a consultative paper containing a revised framework for
market risk.16
In response to the allegations of misconduct in setting the LIBOR rate and in the
foreign exchange markets, both the Financial
Stability Board (FSB) and the International
Organisation of Securities Commissions
(IOSCO) have worked on standards of
behavior related to rate fixing. IOSCO has
also released a policy recommending that
financial institutions assess the suitability
of wholesale and retail clients when selling
complex products.
Banks are also facing new regulations that
require them to restructure their operations.
Under the Federal Reserves FBO EPS, foreign
banks operating in the United States that have
total global assets of $50 billion or more and
also have $50 billion or more in US nonbranch assets are required to form an intermediate holding company and run their US
operations as a standalone bank.
In Europe, several structural reform initiatives may require banks to revise their business models and restructure their operations
due to restrictions placed on businesses such
as proprietary trading and requirements for
ring-fencing their retail operations and their
investment banking and trading operations
into separate subsidiaries.17 Legislation now
exists in France, Germany, Belgium, and the
United Kingdom. In the United Kingdom, the
largest banks were required to submit preliminary plans in January 2015 to the Bank of
Englands Prudential Regulation Authority for
how they will implement ring-fencing of their
retail banking operations.18 In 2014, the EC
issued a proposal to ban proprietary trading
and require ring-fencing for EU-headquartered
global systemically important banks (G-SIBs)
as well as other banks with substantial trading activities in the European Union, even
if headquartered elsewhere.19 Under the EC
proposal, national regulatory authorities would
8
retain substantial discretion on the application

of the rules. The final form of the ring-fencing
rules remains unclear, and in December 2014,
a draft report by the European parliament
proposed that the new rules should remove the
presumption that deposit-taking and trading should be separated and instead provide
regulators with the flexibility to use other tools
to reduce risk.20
Higher capital requirements

Concerned about the solvency of financial institutions in times of financial stress,
regulators have been requiring them to hold
more capital. The Basel Committee is pursuing multiple efforts to transform the current
Basel III capital regime. These efforts include
proposals to revamp the capital charge regimes
for both credit and operational risk, and a
new requirement for Total Loss-Absorbing
Capacity (TLAC), which will require additional financial resources.
The US Federal Reserve has also increased
its capital requirements, as well as adopted a
requirement for TLAC. One estimate is that US
banks will need to add as much as $68 billion
in additional capital to comply.21 In Australia,
the Financial System Inquiry has also recommended adopting a standard for TLAC.
Solvency II, a capital adequacy regime
for European insurers, is due to come into
effect on January 1, 2016. The International
Association of Insurance Supervisors (IAIS) is
also developing a risk-based global Insurance
Capital Standard, which is expected to be completed by the end of 2016.
Stress testing
There has been a trend for regulators to rely
more on stress tests to assess capital adequacy.
In the United States, stress tests have become
the primary capital constraint for banks, with
the Federal Reserve requiring stress tests of
all banks with $10 billion or more in assets
to assess how well they could withstand a
major downturn in the economy and the
financial markets. Stress testing ... holds
great promise as a capital tool, a risk-sensitive

capital tool, for big institutions, said Daniel
K. Tarullo, a governor of the Federal Reserve
who sits on the Federal Reserves financial
stability committee.22
The ECB conducted stress tests of European
banks in 2014. Considered less rigorous
than the US stress tests, only 13 of 130 banks
failed to pass once measures taken in 2014 to
improve their capital are taken into account.23
For its next round of stress tests, the ECB is
planning a more intensive examination of the
regions banks that focuses on the risks and
viability of their business models.24 The Bank
of England also conducts stress tests and told
its banks that the tests in 2015 would be more
exacting and focus more on risks from overseas markets.25 In Australia, the Australian
Prudential Regulatory Authority conducted
stress tests in 2014 of banks mortgage books
across the industry, concluding that the countrys banks were poorly prepared to recover
from another financial crisis.26
With stress tests being required by the
US Federal Reserve, the ECB, the Bank of
England, and other regulators, some large
global institutions will be subject to stress tests
conducted by multiple regulators.
For European insurance companies,
stress tests in 2014 required by the European
Insurance and Occupational Pensions
Authority (EIOPA) concluded that one in
seven insurers in the European Union did not
have the level of capital that will be required
under Solvency II by 2016.27
Volcker Rule
The final Volcker Rule under the DoddFrank Act was released by US regulators in
December 2013. It prohibits various forms
of proprietary trading by banks operating in
the United States and reduces their permitted
investments in hedge funds and private equity
activities. Implementing the Volcker Rule is a
complex task. Market-making, hedging, and
underwriting are still allowed, but it can be
difficult to determine if a trade is permissible
or not. The five major US banking regulatory

bodies charged with implementing the Volcker
Rule will be issuing a report, as mandated by
the Dodd-Frank Act, which will list which
activities are allowed.28
Banks covered by the Volcker Rule
must comply by July 21, 2015.29 However,
in December 2014, the Federal Reserve
announced that banks would have until 2017
to divest their stakes in hedge funds and
private equity funds.30 Banks subject to the
Volcker Rule will need rigorous policies and
procedures, including automated workflows,
that will enable them to comply, including documenting their policies on hedging and justifying the classification of their inventories related
to market-making.31 Institutions with greater
than $10 billion in assets will be required to
subject their compliance with the Volcker
Rule to independent testing, while institutions
with greater than $50 billion in assets will also
be required to furnish an attestation by the
firms CEO. Some foreign banks are considering whether to limit their participation in US
capital markets to take advantage of the solely
outside the United States exemption.
European regulators have also proposed

restrictions on trading activities by banks. The
EC issued a proposal in 2014 that would ban
the largest banks operating in the European
Union from engaging in proprietary trading or having certain relationships with
hedge funds.32 The rules would apply to
EU-headquartered G-SIBs and also to banks
that have large or complex trading operations
in the European Union.
Systemically important
financial institutions
The Financial Stability Oversight Council
(FSOC), comprised of US regulators, was
established by the Dodd-Frank Act and
charged with identifying and addressing risks
to the US financial system. When the FSOC
designates a firm as a systemically important financial institution (SIFI), it is subject
to stricter regulatory oversight and capital
requirements. Several nonbanks have also been
designated as US SIFIs. Designation of a bank
as a SIFI depends on its asset size, but the criteria are more complex for insurers and other
nonbank financial institutions.33 The process
for designating an institution as a US SIFI has
been criticized for a lack of transparency and
clear criteria, and
one institution has
challenged its designation in court.
One objective of
the Dodd-Frank Act
was to address the
problem that some
financial institutions
were considered
too big to fail during the global financial
crisis and received government bailouts. In
response, SIFIs are required to develop recovery and resolution plans (living wills). In
August 2014, however, the Federal Reserve and
the Federal Deposit Insurance Corporation
(FDIC) rejected the living wills submitted by
all the major US financial institutions, saying they were unrealistic and their corporate
structures remained too complex to recover or

resolve in the event of financial distress.34 The
institutions will need to revise these plans and
rethink their underlying structures.
European regulators are also focusing
on resolution. Beginning in 2015, the Single
Resolution Board within the Banking Union
in the European Union will begin working with national authorities on resolution
planning, resolvability assessments, and the
setting of loss absorbency.35 In addition, the
EUs Bank Recovery and Resolution Directive
(BRRD) gives regulatory authorities wideranging powers to mandate banks to change
their legal, operational, and financial structures to improve their resolvability, including
requiring the EU operations of a bank headquartered elsewhere to operate under an EU
holding company.36
Record level of fines

Regulatory fines levied on banks have
mounted to unprecedented levels. Banks
around the world paid a record $56 billion
in fines to regulatory authorities in 2014 and
more than $200 billion over the last several
years.37 Given the size of the fines being levied,
the regulators may need to consider the impact
that fines could have
on the capital of
individual institutions and on the
financial system as
a whole.
These fines
were the result of a
variety of incidents,
including allegations
that banks misled investors about mortgagebacked securities during the global financial
crisis, manipulated foreign exchange markets
and LIBOR interest rates, and violated sanctions imposed on foreign governments including Cuba, Iran, and Sudan. Some have argued
that regulators are using fines as a covert
strategy to restrain the size of large financial
Regulatory fines levied

on banks have mounted
to unprecedented levels.
10
institutions, in an effort to address the problem

of too big to fail.
More regulatory changes

on the horizon
There is every indication that the next few
years will bring further regulatory change.
In October 2014, the Basel Committee
announced proposals to revise the standardized approach for measuring operational risk
capital, moving from using gross income as
a key input to determine the operational risk
charge to what they believe is a statistically
superior approach.38 In December 2014, it
released a consultative document to revise the
standardized approach for credit risk. Among
other changes, the proposal would reduce the
reliance on ratings by credit rating agencies,
require more granularity and risk sensitivity, and provide more comparability with the
internal ratings-based (IRB) approach for
similar exposures.39 Over the next three years,
the Basel Committee is expected to raise the
risk-based capital ratio, revise risk weighting,
and decrease the use of models for assessing
risk and setting capital requirements.40
Although the Dodd-Frank Act was passed
in 2010, establishing the required rules has
been a slow process. As of December 1, 2014,
only 58 percent of the 398 total required rulemakings had been finalized, while 23.6 percent
had not yet been proposed.41
The European Commission (EC) has
launched the Capital Markets Union (CMU) to
develop a single market for capital. These principles apply to all 26 EU member states. One of
the principal goals of the initiative is to maximize economic growth by creating more integrated and deeper capital markets. Although
Europes capital markets have grown in recent
decades, those in the United States remain far
larger.42 The debt securities markets, including the markets for corporate and government
bonds, are three times larger in the United
States than in the European Union, while the
US market for private placements is almost
three times as large as its EU counterpart.43
In February 2015, the EC published its first

green paper (GP) identifying five early initiatives for the CMU agenda: review of the
prospectus regime, high-quality securitization
standards, pan-European private placements,
improving credit information for small and
medium-sized enterprises, and encouraging
the uptake of European Long Term Investment
Funds.44 There are also indications that the
CMU will place a new focus on nonbank forms
of finance, often termed shadow banking,
in an effort to stimulate jobs and growth, and
this may be reflected when the Money Market
Funds Regulation is proposed. Although the
new EU Regulations and Directives was passed
by the EC and Parliament, the European
Supervisory Authorities still have to publish
the detailed implementing standards.45
After a uniform trend of ever-stricter regulatory requirements, there were some developments in 2014 and early 2015 that moved in
the opposite direction in the United States.
The US Congress repealed a provision of the
Dodd-Frank Act requiring banks to push out
the trading of derivatives into subsidiaries that
do not benefit from deposit insurance.46 There
were steps to slow the implementation of the
Volcker Rule and narrow its scope. Smaller
US banks won relaxation of a number of
requirements of the Dodd-Frank Act, including a relaxation of restrictions on lending
and acquisitions, an exemption from stricter
post-crisis rules on mortgage lending, and a
proposal by the Federal Reserve to allow small
banks to assume more debt to finance mergers
and acquisitions.47
Profitability predicament
These developments have placed conflicting
pressures on financial institutions. Institutions
are facing significantly increased compliance
costs due to new regulatory requirements,
more frequent and intrusive examinations, and
greatly expanded fines. Potentially adding to
these costs, in early 2015, European finance
ministers from 11 countries were considering imposing a harmonized tax on financial
11
Cyber risk
transactions.48 At the same time, institutions

are required to hold higher levels of capital
under the capital adequacy standards of Basel
III, the US CCAR, and Solvency II, as well as
a surcharge on G-SIBs imposed by Basel III
and an additional G-SIB surcharge imposed by
some countries such as the United States and
Switzerland. The introduction of minimum
levels of TLAC by the Basel Committee and
the US Federal Reserve will further increase
the capital requirements. The higher capital
requirements have spurred banks to move
away from activities that require more capital,
such as trading. The percentage of bank assets
dedicated to trading dropped from 41 percent
in 2006 to 21 percent in 2013, according to
analysis by the International Monetary Fund.49
But higher compliance costs and increased
capital levels are not all. Many institutions also
have fewer revenue-generating opportunities due to restrictions on proprietary trading,
bank interchange fees, and the loss of marketmaking for over-the-counter derivatives due
to a requirement that derivatives be traded on
exchanges and centrally cleared with lower
margins. The net result of rising compliance
costs coupled with limitations on business
activities is a squeeze on revenues and profitability. For example, revenues at US banks have
been flat since 2010.50
12
Cyber risk continues to increase in importance for financial services institutions and
other companies, which have been targeted
by sophisticated hacker groups. Some of
these groups are believed to be well-financed
criminal organizations, while others appear
to be state-sponsored actors. In 2014, hackers gained access to customer data at several
major US banks in a series of coordinated
attacks, stealing checking and savings account
information, while another attack during the
same year resulted in a data breach impacting millions of insurance customer records.51
In recent years, banks have been subject to
distributed denial of service (DDoS) attacks in
which their networks are flooded with so much
traffic that they slow or stop completely. These
attacks have been blamed on, among others,
China, Russia, North Korea, Iran, and extremist Islamic groups.52
Risk data
Financial institutions face the complex task
of complying with stricter regulatory requirements concerning risk data quality and the
ability to aggregate data in a timely fashion
across the enterprise. The Basel Committees
principles for risk data aggregation and reporting (BCBS 239) currently apply only to G-SIBs,
but there are indications that regulators will
require these principles to be adopted by a
wider group of institutions. Many large banks
have indicated they are facing significant challenges to achieve compliance by the deadline of
January 1, 2016, and smaller institutions may
find it even more difficult to adhere to these
principles. These data standards apply to the
full range of risks facing the organization.
In the United States, the Office of the
Comptroller of the Currency (OCC) has issued
heightened standards for certain large national
banks and a liquidity-coverage rule that will
require many institutions to upgrade their data
capabilities. European insurers will face more
stringent data and reporting requirements as a
result of Solvency II, with preparatory Pillar III
reporting disclosures expected in 2015, prior

to implementation on January 1, 2016. The
European Securities and Markets Authority
is expected to publish new requirements for
reporting by securities firms on post-trade
reporting, transaction reporting, and commodities derivatives positions reporting
requirements under the Markets in Financial
Instruments Regulation (MiFIR).
Conduct risk and risk culture

Recently, regulators have increased their
attention on conduct risk, that is, behavior that
is perceived to have detrimental impacts on
customers, whether retail or wholesale, or that
could harm market integrity. Supporting their
focus on conduct risk, regulatory authorities
are also increasing their scrutiny of the broader
qualitative issues that comprise an institutions
risk culture, such as its ethical standards, its
compensation practices, and the role of the
board of directors and senior management
in promoting ethical behavior. Commenting
on the importance of conduct risk and risk
culture, William Dudley, the president of
the Federal Reserve Bank of New York, said,
There is evidence of deep-seated cultural and
ethical failures at many large financial institutions. Whether this is due to size and complexity, bad incentives, or some other issues
is difficult to judge, but it is another critical
problem that needs to be addressed.53
In its report on risk governance in February
2013, the FSB identified the importance for
regulators to assess business conduct and the
suitability of products, both the type of products and whom they are sold to.54 Since then
there have been a variety of developments by
regulators around the work addressing conduct
risk and risk culture.
Regulators in the United Kingdom have
been especially active in this area. The Senior
Managers Regime introduced for banking
and insurance will result in more supervisory
scrutiny of individuals, while the Prudential
Regulation Authority has placed a premium
for institutions to manage conduct risk and
also to create and embed risk culture. In 2013,

a new Financial Conduct Authority (FCA)
was created with the goal of ensuring that the
financial industry is run with integrity and
that consumers are treated fairly. Among the
FCAs priorities for 20152016 are to review
culture change programs in retail and wholesale banks, inducements and conflicts of
interest relating to retail investment advice,
and retirement sales practices.55 The Fair and
Effective Markets Review (FEMR) was established in 2014 with the goal of restoring trust
in wholesale financial markets in the wake
of recent abuses, and the Banking Standards
Review Council was launched in 2015 with
the mission of promoting high standards of
behavior across the industry. Elsewhere in the
European Union, supervisory authorities have
also been encouraged to increase the focus on
consumer protection.
In the United States, enforcement actions
by the Consumer Financial Protection Bureau
have resulted in large restitution requirements
and fines levied on financial institutions. The
US Federal Reserve has placed a new emphasis
on how financial institutions can encourage
ethical behavior by their employees through
appropriate hiring, compensation, promotions, and demotions, as well as by having
senior management stress the importance of
ethical behavior.56 The US Comptroller of the
Currency, Thomas Curry, has said that assessment of a banks culture could significantly
affect the OCCs CAMELS rating for capital
adequacy, asset quality, management, earnings,
liquidity, and sensitivity to market risk.57
The US Federal Reserve, the OCC, and the
FDIC are working to implement regulatory
requirements for incentive compensation as
mandated by the Dodd-Frank Act. There are
indications that these rules may require that
institutions employ clawbacks in cases of fraud
or excessive risk-taking and also retain a significant portion of compensation for a period.58
In Asia, Singapores Financial Advisory
Industry Review Panel completed a comprehensive review of the financial services
industry in 2013 and released a consultation
13
paper on legislative amendments for comment

in October 2014.59 One of its principal objectives was to promote a culture of fair dealing in
the distribution of investment and life insurance products.60 The Hong Kong Monetary
Authority has launched a Treat Customers
Fairly initiative designed to improve corporate culture and customer practices among
retail banks.61
Banks are responding to the regulatory

focus on culture by establishing new committees, conduct-risk functions, and policies.62 While no one disputes its importance,
financial institutions are struggling to develop
approaches to measure and quantify risk
culture through such tools as employee surveys
and scorecards as well as the use of more
innovative techniques.63
ABOUT THE SURVEY

This report presents the key findings from the ninth edition of Deloittes ongoing assessment of risk management
practices in the global financial services industry. The survey gathered the views of CROs or their equivalents at 71
financial services institutions around the world and was conducted from August to November 2014.
The institutions participating in the survey represent the major economic regions of the world, with most
institutions headquartered in the United States/Canada, Europe, or Asia Pacific (figure 1). Most of the survey
participants are multinational institutions, with 68 percent having operations outside their home country.
The survey participant companies provide a range of financial services offerings, including insurance (58 percent),
banking (55 percent), and investment management (48 percent) (figure 2).64
The institutions have total combined assets of US$17.8 trillion and represent a range of asset sizes (figure 3).
The survey participants that provide asset management services represent a total of US$5.6 trillion in assets
under management.
Where relevant, the report compares the results from the current survey with those from earlier surveys in this
ongoing series.
Figure 1. Participants by headquarters
location
Africa
Latin 6%
America
8%
Asia
Pacific
14%
58%
Insurance
United
States and
Canada
39%
Europe
33%
Figure 2. Participants by financial

services provided
Banking
Investment
management
Figure 3. Participants by asset size
< $10B
22%
> $100B
37%
55%
48%
Note: Percentages total more than 100% since

respondents could make multiple selections.
$10B$100B
41%
Graphic: Deloitte University Press | DUPress.com
Analysis by asset size

In this report, selected survey results are analyzed by the asset size of participating institutions using the
following definitions:
Small institutionsinstitutions with total assets of less than US$10 billion
Mid-size institutionsinstitutions with total assets of US$10 billion to less than $100 billion
Large institutionsinstitutions with total assets of US$100 billion or more
14
Risk governance
Role of the board of directors
HE central role of the board of directors in providing oversight of a financial

institutions risk management program has
been a regulatory expectation for some time.
In October 2010, the Basel Committee issued
principles designed to enhance governance
that addressed the role of the board of directors in risk management, the qualifications of
the board members, and the importance of
an independent risk management function.
The US OCC issued its heightened standards
requiring that large banks have a boardapproved risk-governance framework. For US
insurers, in 2014 the National Association of
Insurance Commissioners (NAIC) approved
a framework for adoption by the states that
requires insurers to file an annual report about
their corporate governance practices, including their governance framework, the policies
and practices of their board of directors and
committees, and their management policies
and practices.65
More than six years after the global financial crisis, risk management continues to
demand greater attention from boards of directors. Eighty-five percent of respondents said
their board of directors currently devotes more
time to oversight of risk than it did two years
ago; only 1 percent said it spends less time than
before. However, the pace of increasing board
activity on risk management appears to be
slowing. Forty-four percent of respondents said
their board of directors spends considerably
more time than before on risk management,
compared to 67 percent in the 2012 survey.66
Molly Scherf, a deputy US comptroller in the
OCC, commented in early 2015 about large US
With regard to changes

in risk governance, if we
start from the top at the
board level, there is a lot
more interest in the risk
management policy. Riskfocused discussion is getting
a lot more air time than it
did five years ago.
Chief risk officer, insurance
banks, Theres clear evidence across all large

institutions that boards of directors are more
actively overseeing banks they supervise.67
Among subgroups of participants, both
European respondents and those from small
institutions were more likely to say their board
of directors is devoting considerably more time
than before to oversight of risk. Fifty-two percent of European respondents said their board
now spends considerably more time on risk
management than two years ago, compared to
39 percent among respondents in the United
States/Canada.68 Among small institutions, 56
percent said their board devotes considerably
more time to risk management than before,
compared to 41 percent for mid-size institutions and 38 percent for large institutions.
These trends are consistent with the focus on
board risk oversight, which began with large
15
institutions, followed by mid-sized and then

smaller institutions.
Most boards of directors have a wide variety
of risk management responsibilities. The board
responsibility cited most often was approve the
enterprise-level statement of risk appetite (89
percent), which is up from 78 percent in 2012,
and reflects the emphasis that regulators have
placed on the boards responsibility in this area
(figure 4). Although almost all respondents
said their board of directors approves a risk
appetite statement, fewer said it engages in several other monitoring and planning activities
that are needed for the risk appetite statement
to inform the institutions decisions, including

review corporate strategy for alignment with
the risk profile of the organization (80 percent),
monitor risk appetite utilization including financial and non-financial risk (77 percent), and
monitor new and emerging risks (71 percent).
Fewer boards of directors are active in other
areas, although there has been some progress
since 2012. Sixty percent of respondents said
their board of directors works to establish
and embed the risk culture of the enterprise
and promote open discussions regarding risk,
which is an increase from 51 percent in 2012.
This is consistent with the increased focus
Figure 4. Which of the following risk oversight activities does your companys board of directors or
board risk committee(s) perform?
Approve the enterprise-level statement
of risk appetite
89%
Review regular risk management reports on the

range of risks facing the organization
86%
Review and approve overall risk management

policy and/or ERM framework
84%
Review and approve the organizations formal

risk governance framework
83%
Review corporate strategy for alignment with the risk

profile of the organization
80%
Monitor risk appetite utilization including

financial and non-financial risk
77%
71%
Monitor new and emerging risks

Review individual risk management policies, e.g., for
market, credit, liquidity, or operational risk
69%
Review incentive compensation plans to

consider alignment of risks with rewards
63%
Conduct executive sessions with the

chief risk officer (CRO)
61%
Help establish and embed the risk culture of the

enterprise; promote open discussions regarding risk
60%
Review managements steps to remediate any

noncompliance with risk management policy
Define risk management reporting lines
and independence
Review the charters of management-level
risk committees
56%
41%
37%
16
by regulators around the world on managing

conduct risk and embedding a risk culture that
promotes ethical behavior by employees.
Reviewing incentive compensation is
another area where board involvement has
become more common but where there is still
room for improvement. Sixty-three percent of
respondents said a responsibility of their board
of directors is to review incentive compensation plans to consider alignment of risks with
rewards, which is up from 49 percent in 2012.
With increasing regulatory expectations
for boards of directors, institutions may find it
more difficult than before to identify qualified
board members when seats become vacant.
Today, board members need more knowledge
of the business and greater skills, especially
for those serving as designated risk experts. At
the same time, potential board members may
conclude that serving on the board of a financial institution or on the board risk committee
entails greater personal risks than before.
Board risk committees

There has been a continuing trend toward
the board of directors placing oversight
responsibility in a board risk committee. This
structure is a regulatory expectation and has
come to be seen as a leading practice. The EPS
issued by the Federal Reserve in March 2014
requires that US publicly traded banks with
consolidated assets of $10 billion or more have
a risk committee of the board of directors
that is chaired by an independent director.69
The risk committee is expected to review and
approve the risk management policies of the
banks global operations. For US banks with
consolidated assets of $50 billion or more, the
risk committee must be an independent committee of the board and have exclusive oversight of the banks risk management policies
and risk management framework for its global
operations. The Federal Reserves EPS for foreign banks requires foreign banking organizations that have total global assets of $50 billion
or more and also have $50 billion or more in
US non-branch assets to establish a US risk
committee overseeing all US operations.70 This

committee may either be placed at the intermediate holding company for its US operations,
or else at the board of directors of the parent.
In either case, this committee is required to
have at least one independent director.
Respondents most often said the board of
directors assigns its primary oversight responsibility to the board risk committee (51 percent), which is an increase from 43 percent in
2012. An additional 23 percent of respondents
said oversight is assigned to other board committees: audit committee (10 percent), combined audit and risk committees (7 percent), or
multiple board committees (6 percent).
Yet, the second most common structure is
to have oversight responsibility lodged in the
full board of directors (23 percent).
Placing responsibility in a board risk committee is much more common in the United
States/Canada (61 percent) than in Europe
(30 percent), which reflects the emphasis that
the Federal Reserve and the OCC have placed
on this approach. Among small institutions,
only 19 percent assign primary oversight to a
board risk committee, compared to 55 percent
for mid-size institutions and 65 percent for
large institutions. Among small institutions, 25
percent of respondents said oversight responsibility is assigned to the audit committee of the
board, while 19 percent said it was shared by
the audit and risk committees.
There is a regulatory expectation that the
board risk committee should contain independent directors and an identified risk management expert, and more financial institutions
are following these practices. In the survey,
86 percent of respondents reported that their
institution has at least one independent director on its board risk management committee,
up from 58 percent in 2012, and 79 percent
said the risk committee is chaired by an independent director, up from 54 percent in 2012.
In 2014, 60 percent of respondents said the
board risk committee contains an identified
risk management expert, up slightly from 55
percent in 2012, with this being more common in the United States/Canada (68 percent)
17
than in Europe (43 percent). One reason for

the differences between regions is that while
US regulations have the expectation that the
board risk committee contains an identified
risk management expert, European regulations
contain a more general requirement that risk
committee members ... shall have appropriate
knowledge, skills and expertise to fully understand and monitor the risk strategy and the
risk appetite of the institution. 71
A separate study of US banks with more
than $50 billion in assets by the Deloitte
Center for Financial Services found that
institutions having board risk committees that
review and approve the firms risk management framework and also those that require
a risk expert on the risk committee each had
a higher average return on average assets
(ROAA) than other institutions.72 Although
these practices may not directly cause higher
performance, they may indicate that a connection exists between good risk governance and
stronger performance.
Role of the CRO

Although the board of directors has ultimate oversight responsibility for risk management, senior management is responsible for
managing the risk program, including fostering effective coordination with other functions, such as finance and human resources,
and with the lines of business. Senior management is also the key player in fostering
a culture that integrates risk considerations
when making business decisions and promotes
ethical behavior.
The existence of a CRO or an equivalent
position that has management oversight for the
risk management program across the organization is a leading practice and a regulatory
expectation. Over the more than 10 years
of Deloittes global risk management survey
series, the CRO position has become almost
universal. In 2014, 92 percent of respondents
said their institution has a CRO or equivalent
position,73 up slightly from 89 percent in 2012
and up sharply from 65 percent in 2002 (figure
5). The existence of a CRO is closely related to
the size of the institution. All the respondents
at large institutions and 97 percent of those at
mid-size institutions reported having a CRO,
compared to 69 percent at small institutions.
It is also considered a leading practice for
the CRO to report directly to the board of
directors, but this practice is not widespread.
Most respondents said the CRO reports to
the institutions CEO (68 percent), while only
46 percent said the CRO reports to the board
of directors.74 Both figures are similar to the
results in 2012.
When it comes to the management-level
oversight of the risk management program,
regulatory expectations and leading practice
Figure 5. Does your organization currently have a CRO or equivalent?

100%
90%
80%
70%
81%
86%
84%
89%
92%
2012
2014
73%
65%
60%
50%
40%
30%
20%
10%
0%
2002
2004
2006
2008
2010
Note: Figures indicate the percentage of institutions with a CRO or equivalent.

18
suggest the CRO should have primary oversight responsibility, and more institutions are
moving in this direction. In the current survey,
respondents were most likely to report the
CRO has primary oversight responsibility (55
percent), an increase from the 2012 survey
(42 percent). At the same time, the percentage
of respondents that said the CEO is primarily responsible for risk management oversight
dropped to 23 percent from 39 percent in 2012.
Assigning primary responsibility for risk
management to the CRO is less common
among institutions providing investment
management services (44 percent) than among
those in banking (67 percent) or insurance (66
percent). These differences are likely shaped by
industry practices driven by prevailing business models and regulatory expectations. As
expected, the risk management program is also
less likely to be overseen by the CRO at small
institutions (38 percent) than at mid-size (62
percent) or large institutions (58 percent).
What roles do institutions assign to their
firm-wide, independent risk management
group? Leading the list of responsibilities is
develop and implement the risk management
framework, methodologies, standards, policies,
and limits (98 percent). The items cited next
most often were oversee risk model governance
(94 percent) and meet regularly with board of
directors or board risk committees (94 percent).
More work is needed to establish a consistent set of risk responsibilities for boards
of directors. Risk should be considered when
setting strategy or establishing company objectives, but 32 percent of respondents said the
head of the firm-wide risk management group
does not serve as a member of the executive management committee. Although it is
important for organizations to understand the
risks they are assuming when they enter new
lines of business or introduce new products,
only 57 percent of respondents said approving
these initiatives is a responsibility of their risk
management group. Since the global financial
crisis, the role of compensation in risk management has received close attention from both
regulators and investors, but just 51 percent
of respondents said a responsibility of the independent risk management group is to review

compensation plan to assess its impact on risk
appetite and culture.
Risk appetite
The development of a written statement
of risk appetite plays a central role in clarifying the level of risk an institution is willing to
assume. It can serve as important guidance for
senior management when setting the institutions strategy and strategic objectives, as well
as for the lines of business when seeking new
business or considering their trading positions.75 Since the global financial crisis, the
importance of a risk appetite statement has
received greater attention. In 2009, the Senior
Supervisors Group, which is composed of
the senior financial supervisors from seven
countries,76 released a report that identified the
failure of some boards of directors to establish
the level of risk acceptable to their institution,77 and the following year released a series
of recommendations regarding the issue.78
The FSB issued principles for an effective risk
appetite framework in November 2013.79 In
the United States, the OCC issued enforceable guidance for heightened standards that
require banks with more than $50 billion in
consolidated assets to have a comprehensive
risk appetite statement that is approved by the
board of directors.
Given the key role of the risk appetite
statement, it is a prevailing practice for it to be
reviewed and approved by the board of directors. Three-quarters of respondents said their
institution has a written enterprise-level statement of risk appetite that has been approved
by the board of directors, an increase from 67
percent in 2012. An additional 13 percent said
their institution was currently in the process of
developing a risk appetite statement and seeking board approval.
Most respondents at large and mid-size
institutions said their organization has a
board-approved risk appetite statement, and
this was more common than in 2012: large
19
The process of developing

our risk appetite statement
has promoted and been
a catalyst for some really
good discussions about
whats important to us as
an organization. Our risk
appetite statement is not
just about listing things we
dont want to have happen:
Its about understanding the
risks we should be taking.
Chief risk officer, insurance
institutions (85 percent versus 67 percent in

2012) and mid-size institutions (79 percent
versus 61 percent in 2012).
It is a regulatory expectation that both
banks and insurance companies have a risk
appetite statement approved by their board of
directors and almost all banks (95 percent) and
insurance companies (97 percent) either have
a board-approved statement of risk appetite or
are in the process of developing one and seeking approval. This was somewhat less common
for investment management firms (83 percent).
Regulatory expectations regarding the
application of the risk appetite statement
have been relatively modest. Regulators have
indicated they want institutions to have a
risk appetite statement and to use it and
report on it, but have not been specific about
its characteristics.
Developing an effective statement of risk
appetite can pose a variety of challenges. It can
be difficult for institutions to define their risk
20
appetite separately for individual risk types and

then measure risk in each area. The two issues
that respondents most often considered to be
extremely or very challenging were defining
risk appetite for strategic risk (55 percent) and
defining risk appetite for reputational risk (55
percent) (figure 6). Measuring strategic risk
requires an institution to assess the overall
risk posed by, and to, its business strategy.
Reputational risk is typically a secondary risk
that is the consequence of other types of risk
events such as market, credit, or operational
risk. Both are difficult to measure and establish
limits for. The issue cited next most often as
extremely or very challenging was defining risk
appetite for operational risk (38 percent), which
poses similar measurement difficulties.
An encouraging sign was that several
important tasks in developing and implementing a risk appetite statement were considered
challenging by relatively few respondents:
integrating stress testing results when defining
risk appetite (21 percent), gaining the active
participation of business units in implementing
the risk appetite and risk limits (18 percent),
and complying with regulatory expectations
regarding risk appetite (11 percent). In some
cases, business unit management may resist the
use of risk appetite as limiting their ability to
manage their business activities and generate
profits, but this does not appear to be common.
Three lines of defense risk

governance model
Employing a three lines of defense
approach to risk management is increasingly
accepted as a leading practice that specifies
the risk management roles played by different
parts of the organization.
The three lines of defense governance
model can be summarized as follows:
Line 1: Business units own and
manage risks
Line 2: Control functions for risk provide
oversight and control
Figure 6. How challenging is each of the following in defining and implementing your organizations
enterprise-level risk appetite statement?
Defining risk appetite for strategic risk
55%
Defining risk appetite for reputational risk
55%
38%
Defining risk appetite for operational risk

Allocating the risk appetite among different
business units
37%
Translating the risk appetite for individual risk types into

quantitative risk limits
35%
Integrating stress testing results when defining

risk appetite
21%
Gaining the active participation of business units in

implementing the risk appetite and risk limits
Complying with regulatory expectations regarding
risk appetite
18%
11%
Note: Figures represent the percentage of respondents identifying each item as extremely or very challenging.
Line 3: Internal audit function validates the

risk and control framework
The three lines of defense risk governance
model has become widely adopted. In 2014,
94 percent of respondents reported that their
institution employs this model, up from 88
percent in 2012.
Respondents said the most significant challenge in employing the three lines of defense
model is defining and maintaining the distinction in roles between line 1 (the business) and
line 2 (risk management), with 51 percent of
respondents citing this as a significant challenge.80 In addition, 36 percent of respondents
said getting buy-in from line 1 (the business)
presents a significant challenge. This proved
especially challenging for small institutions (54
percent) compared to mid-size (31 percent)
and large institutions (32 percent).
21
Enterprise risk management
N ERM program is designed to provide

a comprehensive assessment of the risks
an institution faces and a process for managing
them. By taking an integrated view across the
organization, ERM programs assist institutions
in understanding the full range of risks they
face and how these compare to its risk appetite. They also help identify interrelationships
among risks in different lines of business or
geographies that might have gone undetected.
Both large and mid-size financial institutions
are being encouraged by regulatory authorities
to implement ERM programs and integrate
their findings into business decision-making.
Ninety-two percent of respondents said
their institution either has an ERM program in
place or is in the process of implementing one,
an increase from 83 percent in 2012 and 59
percent in 2008 (figure 7). As expected, having
an ERM program in place or implementing
one is more common in large (85 percent) and
mid-size institutions (72 percent) than in small
institutions (38 percent).
Among institutions that have an ERM

program or are implementing one, 92 percent
have an approved ERM framework and/or an
ERM policy, including 78 percent that have it
approved by the board of directors or a board
committee. A positive trend is that both figures
have increased significantly since 2012 when
73 percent reported having an ERM framework and/or policy and 59 percent said it was
approved by the board or a board committee.
Key challenges
Complying with new regulations was seen
by respondents as by far the greatest challenge,
with 79 percent of respondents saying increasing regulatory requirements and expectations is
extremely or very challenging for their institution (figure 8).
Other issues that were often seen as
extremely or very challenging were risk
information systems and technology infrastructure (62 percent) and risk data (46 percent).
Regulators are expecting financial institutions
Figure 7. Does your organization have an ERM program or equivalent?
36%
59%
79%
52%
21%
23%
83%
92%
62%
27%
69%
23%
2008
2010
Yes, program in place
2012
2014
Yes, currently implementing one

22
Figure 8. How challenging is each of the following for your company when managing risk?
Increasing regulatory requirements and
expectations
79%
Risk information systems and technology

infrastructure
62%
Risk data
46%
Establishing and embedding the risk culture

across the enterprise
35%
Identifying and managing new and

emerging risks
35%
Attracting and retaining risk management

professionals with required skills
32%
Attracting and retaining business unit

professionals with required risk management skills
32%
Aligning compensation and incentives with risk

management
26%
Securing adequate budget and resources
25%
Collaboration between the business units and the

risk management function
17%
15%
Active C-suite involvement
13%
Active involvement of senior management

Collaboration between the risk
management function and other functions
Active involvement of the board of directors
8%
7%
to provide timely information on such issues as

capital, liquidity, stress testing, resolution planning, consumer protection, and Volcker Rule
compliance. Data on these and other areas
need to be timely, accurate, and aggregated
across the enterprise.
Staying current on the changing nature of
the risks facing an institution is difficult, and
35 percent of respondents considered identifying and managing new and emerging risks to be
extremely or very challenging.
The increasing attention by regulators
to risk culture was reflected in the fact that
establishing and embedding the risk culture

across the enterprise was considered to be
extremely or very challenging by 35 percent
of respondents.
Following these issues were two items
related to talent. Roughly one-third of respondents said it is extremely or very challenging
to attract and retain business unit professionals with required risk management skills and a
similar percentage said the same about attracting and retaining risk management professionals. Some commentators have noted the
lack of an adequate supply of talent with risk
23
management skills in such areas as operational,

reputational, and regulatory risk.
A positive indication was the fact that few
respondents considered several important
issues to be extremely or very challenging
for their institution, including collaboration
between the business units and the risk management function (17 percent), active C-suite
involvement (15 percent), and active involvement of the board of directors (7 percent).
Although progress has been made, institutions
often face challenges in implementing the three
lines of defense model and having their business units fully embrace their role as the first
line of defense in owning and managing risks.
Given all these challenges, it is not surprising that 65 percent of respondents expected
their institution would increase spending on
risk management over the next three years
by 5 percent or more, including 37 percent
who expected spending to rise by 10 percent
or more.
Aligning compensation
In recent years, there has been increased
scrutiny on whether incentive compensation
at financial institutions is aligned with risk
appetite and whether compensation plans
may encourage excessive risk taking. Among
its other provisions, the heightened standards
guidance issued by the OCC in 2014 requires
banks with more than $50 billion in consolidated assets to have well-specified talent management and compensation programs.
Responding to changing expectations
by regulatory bodies, as well as by investors
and the general public, in recent years there
has been a tremendous shift in compensation practices. Many financial institutions
24
have enhanced their governance processes

and increasingly use such tools as multiple
incentives, clawbacks, and payment in stock.
Although improved compensation practices
on their own cannot prevent employees from
taking inappropriate risks, the economic
incentive to do so for personal gain has been
severely curtailed.
Given the focus on aligning compensation
with a firms risk appetite, it was surprising that
only 63 percent of respondents said their board
of directors or board risk committee reviews
incentive compensation plans to consider alignment of risk with rewards.
Some leading compensation practices
are relatively common among management,
including require that a portion of the annual
incentive be tied to overall corporate results (72
percent), balance the emphasis on short- and
long-term incentive (64 percent), use of multiple incentive plan metrics (62 percent), and
deferred payouts linked to future performance
(61 percent) (figure 9). However, relatively few
respondents said their institution uses other
compensation practices designed to align
employee incentives with the institutions risk
management objectives such as caps on payouts
(30 percent), establish for employees identified as material risk takers a maximum ratio
between the fixed and the variable component
of their total remuneration (29 percent), use of
individual metrics tied to the implementation of
effective risk mitigation strategies (28 percent),
and match the timing of payouts with the term
of the risk (19 percent). It is likely that many of
these practices will become more widespread
over time as regulators focus on compensation as part of their increased attention to
risk culture.
Figure 9. Which of the following practices does your organization employ regarding compensation?
Require that a portion of the annual incentive be tied
to overall corporate results
72%
Balance the emphasis on short- and long-term

incentives
64%
Use of multiple incentive plan metrics
62%
Deferred payouts linked to future performance
61%
Payment in company stock
58%
Incorporate risk management effectiveness into

performance goals and compensation for senior
management
54%
Incorporate risk management effectiveness into

performance goals and compensation for
professionals identified as risk-takers
(e.g., trading, investing, lending)
48%
Use of clawback provisions (e.g., in the event of

misconduct or overstatement of earnings)
46%
30%
Caps on payouts
Establish for employees identified as material risk-takers
a maximum ratio between the fixed and the variable
component of their total remuneration
29%
Use of individual metrics tied to the

implementation of effective risk mitigation strategies
Match the timing of payouts with the term of the risk
28%
19%
25
Economic capital
ANY financial institutions calculate

economic capital to assess their riskadjusted performance and allocate capital. All
the respondents reported that their institutions
calculate economic capital, an increase from
roughly 80 percent in 2012, and said they most
often calculate it for market risk (72 percent),
credit risk (68 percent), and operational risk
(62 percent). Economic capital is used much

less often for other risk types such as liquidity
risk (30 percent), strategic risk (20 percent),
reputational risk (17 percent), or systemic risk
(8 percent).
The most common uses of economic capital
are at the senior management level for strategic
decision-making (67 percent) and at the board
Figure 10. For which of the following risk types does your organization calculate economic capital?
Market
72%
Credit
68%
Operational
62%
Interest rate risk of the

balance sheet
52%
51%
Counterparty credit
49%
Mortality*
Lapse*
41%
39%
Property and casualty*

Diversification effects/benefits
across risk types
38%
34%
Morbidity*
30%
Liquidity
29%
Catastrophe*
20%
Strategic
17%
Reputational
Systemic
8%
*Asked of respondents at institutions that provide insurance or reinsurance services.

26
level for strategic decision-making (63 percent).

It is used less often at lower levels such as at
the business unit level to evaluate risk-adjusted
performance (53 percent), at the transaction
level for risk-based pricing (54 percent), or at
the customer level to support risk-based profitability analysis (32 percent).

Many banks and insurance companies also
need to comply with regulatory requirements
for capital adequacy. (See Sector spotlight:
Banking and Sector spotlight: Insurance.)
27
Stress testing
EGULATORY authorities, including the

Federal Reserve, the ECB, the Bank of
England, and EIOPA for insurers, require
financial institutions to conduct stress tests. In
the United States, the stress tests under CCAR
assess a wide range of issues including capital
adequacy, risk appetite, data, and financial
planning, among others. It also requires that
banks clearly document their risk management processes and internal controls.82 In
recent years, regulatory authorities have been
expanding the scope of stress tests beyond
solely quantitative results to also encompass
qualitative issues such as the effectiveness of
the risk management control environment
and information systems, the quality of risk
data, whether all relevant risks are addressed,
the adequacy of risk models, and the ability of
the risk management program to identify and
manage emerging risks.
Facing a variety of different stress testing
mandates from different jurisdictions, some
global financial institutions respond piecemeal
to each set of requirements, which can lead to
duplication of effort and increase the potential
for control failures. Institutions can benefit
from developing a consolidated approach that
will allow them to use consistent procedures
to comply with the distinct stress requirements
imposed by the different regulators in the jurisdictions where they operate.
With the regulatory focus on stress testing,
it is not surprising that 94 percent of respondents said their institution uses stress testing,
the same percentage as in 2012, although stress
testing is less widespread among small institutions (75 percent).83
28
In 2014, respondents were more likely to

say stress testing plays a wider range of roles
in their organization than was the case in
2012, indicating that this tool appears to be
more embedded in planning and operations.
Respondents most often said stress testing
enables forward-looking assessments of risk (86
percent versus 80 percent in 2012), feeds into
capital and liquidity planning procedures (85
percent versus 66 percent), informs setting of
risk tolerance (82 percent versus 70 percent),
informs setting of capital and liquidity targets
(80 percent versus 61 percent), and supports
the development of risk mitigation and contingency plans (77 percent versus 57 percent).
To strengthen their stress-testing programs, some institutions are working to better
integrate data from risk management and
finance and improve the coordination of these
two functions. Typically, the finance function
is responsible for financial projections, capital management, and reporting to regulators,
while the risk management function is responsible for calculating risk levels. To be effective,
stress testing must be a shared effort, but at
some institutions these functions operate as
separate silos, with incompatible information
systems and with distinct cultures.
Although the vast majority (94 percent) of
respondents use stress testing in some capacity, the specific uses vary widely (figure 11).
Leading the list of areas where institutions use
stress testing either extensively or somewhat
were reporting to the board (94 percent), understanding firms risk profile (92 percent), and
reporting to senior management (92 percent).
At the lower end of practice, only 40 percent
Figure 11. To what extent are the results of stress tests used by your organization for each of the
following purposes?
47%
Reporting to the board

Reporting to senior management
50%
Understanding firms risk profile
42% 92%
44%
Regulator inquiries
48% 92%
43%
Assessing adequacy of
regulatory capital
46% 89%
52%
Defining/updating capital capacity

requirements for risk
34% 86%
39%
Defining/updating risk appetite
45% 84%
35%
Strategy and business planning
48% 83%
19%
Assessing concentrations and

setting limits
59% 78%
26%
Assessing adequacy of
economic capital
51% 77%
44% 74%
30%
54% 71%
17%
Rating agency inquiries

Deciding on hedging and other risk
mitigation strategies
47% 94%
52% 65%
13%
Allocating capital to businesses

and products 5%
39% 44%
Pricing products or benefits 3%
37% 40%
Merger and acquisition decisions 6%
34% 40%
Extensively used
Somewhat used
Note: Percentages were calculated on a base of respondents at institutions using stress testing.
of respondents reported using stress testing for

merger and acquisition decisions.
However, the area where respondents most
often said their institution extensively uses
stress testing results was assessing the adequacy
of regulatory capital (52 percent up from 45
percent in 2012). This is consistent with the
increased reliance by regulators, including
the Federal Reserve and the ECB, on stress
tests to assess whether financial institutions
have sufficient capital to withstand a severe
economic downturn.
Several other uses of stress testing results
were also cited more often in 2014 as being
used, either extensively or somewhat, than in
2012: assessing adequacy of economic capital (74 percent up from 58 percent in 2012),
assessing concentrations and setting limits (77
percent up from 67 percent), strategy and business planning (78 percent up from 68 percent),
and defining/updating risk appetite (83 percent
up from 73 percent).
The key challenges in using stress testing
concern data quality and the validation of
models. Conducting stress tests requires highquality, aggregated, and timely data, but this
is a challenge for many institutions. The item
most often rated as extremely or very challenging in using stress testing was data quality and
management for stress testing calculations (44
percent).
Regulatory authorities are requiring that
all models employed in stress testing be
validated, and 40 percent of respondents said
implementing formal validation procedures and
documentation standards for the models used in
29
stress testing was also extremely or very challenging. In a large institution, validation could
cover hundreds of models and require a major
commitment of resources. Further, the level
of rigor now required by the Federal Reserve
is higher when testing the underlying models.
The Federal Reserve has expanded the definition of the models that need to be tested,
which has increased the size of the task and
expanded the required scope of stress testing.
The greater attention by regulators on stress
testing and its expanded use by financial institutions have made it more difficult to secure
professionals with the skills and expertise
required. Eighty-eight percent of respondents
said attracting and retaining risk management
professionals with the required skills is at least
somewhat challenging, including 32 percent
30
that considered securing talent to be extremely

or very challenging.
With greater attention by regulators on
stress testing at banks, respondents from these
institutions were more likely to say they found
issues to be challenging than those from other
institutions. For example, 44 percent of respondents at banks said that attracting and retaining risk management professionals with the
required skills is extremely or very challenging
with respect to stress testing, compared to 34
percent among insurance companies. Similarly,
implementing formal validation procedures and
documentation standards for the models used in
stress testing was considered to be extremely or
very challenging by 50 percent of respondents
at banking institutions compared to 37 percent
of those at insurers.
Sector spotlight: Banking
ANKS have been subject to an array of

new regulatory requirements, which have
increased their costs of compliance while
placing new limits on their business activities. These have included the Dodd-Frank Act
in the United States, the US Federal Reserves
EPS, Basel III capital and liquidity requirements, and stress tests required by the Federal
Reserve and the ECB. Given the volume of
regulatory changes, it is not surprising that
respondents in banking (51 percent) were
more likely to report that their board of directors is devoting considerably more time to the
oversight of risk management than before than
were those in investment management (38
percent) and insurance (37 percent).
Basel III
Basel III introduced a higher capital
requirement, with banks required to hold
capital equivalent to at least 6 percent of tier 1
risk-weighted assets and a capital conservation buffer of 2.5 percent. There are indications that the Basel Committee will issue
additional requirements for global systemically
important banks (G-SIBs). In 2014, the FSB, in
consultation with the Basel Committee, issued
a public consultation with proposed requirements for G-SIBs that include a minimum level
of TLAC of 16 to 20 percent of risk-weighted
assets, which is double the current Basel III
capital level, and a minimum 6 percent leverage ratio, which is also twice the Basel III
leverage requirement.84 The Basel Committee
is also expected to issue new guidelines that
will reduce the discretion banks currently have
regarding the level of risk they assign to their

assets and will standardize the methodologies used to assign risk weightings, potentially increasing the required capital for some
banks.85 The Basel Committee has indicated
that it will propose a floor on the minimum
amount of capital banks are required to hold,
even if they use their own models to assess the
risk of their assets, which may reduce the capital relief provided by using internal models.86
In December 2014, the Federal Reserve
proposed that the eight largest US banks,
which are designated as G-SIBs, be subject to
an additional capital surcharge ranging from 1
to 4.5 percent above the capital requirements
under Basel III, with the size of the surcharge
depending on the extent to which an institution relies on short-term funding such as
overnight loans.87 Under the proposal, the new
requirements would be phased in by 2019,
although the Federal Reserve said that almost
all the banks already meet the stricter requirements. The eight largest US banks are also
required by the Federal Reserve to increase
their total TLAC to a minimum of 3 percent to
5 percent of assets.
Some countries have also set higher
capital standards than contained in Basel III.
Switzerland has imposed a higher requirement for its systemically important banks of 19
percent of total capital through the so-called
Swiss Finish compared to 13 percent mandated by Basel III.88 China added a 1 percent
capital buffer for G-SIBs above the Basel III
requirement, and Singapore imposed a higher
requirement of 10.5 percent for its tier 1
capital ratio.89
31
The Basel III deadlines for regulatory

capital are being phased in through 2019, and
almost all the banks participating in the survey
are well along in complying.90 Eighty-nine
percent of respondents said their bank already
meets the minimum capital ratios, while 8
percent expect to meet them well before the
deadlines and 3 percent expect to meet them
by the deadlines.
Complying with the Basel III capital
requirements can have substantial impacts on
a bank. By far, the most common actions that
banking respondents said their institution
had taken, or were planning to take in order
to respond was to devote more time on capital
efficiency and capital allocation (75 percent).
The steps cited next most often were improve
ongoing balance sheet management (47 percent)
and migrate to internal modeling approaches
(42 percent up from 27 percent in 2012).
In contrast, scale back on capital-intensive
portfolios was mentioned by 22 percent of
banking respondents in 2014, down from 43
percent in 2012, suggesting that some institutions have already restructured their businesses and portfolios in response to the new
capital requirements.
Relatively few respondents said their bank
had taken or was intending to take more strategic responses to Basel III such as exit or reduce
an existing business area (22 percent), assess
the continuing economic viability of individual
trading businesses (14 percent), adjust business
models (14 percent), or enter into a merger
(3 percent). In sharp contrast, 49 percent of
respondents in 2012 said their bank expected
to change its business model in response.
While some of the planned changes to business
models may have already taken place, the continuing revisions to Basel III over the next few
years in such areas as capital adequacy requirements and leverage ratios may lead some banks
to reconsider whether they need to adjust their
business model or activities.
32
Liquidity
Banks are also responding to new regulatory requirements addressing liquidity. Basel
III introduces two new liquidity ratios: the
Liquidity Coverage Ratio (LCR) and the Net
Stable Funding Ratio (NSFR).
The LCR requires banks to maintain a
specified level of cash and liquid assets that
would be available to survive a 30-day severe
downturn. On January 1, 2015, the LCR
required banks to have high-quality liquid
assets (HQLA) equal to at least 60 percent
of total expected cash outflows in a specified
stress scenario over the next 30 days.91 The
LCR will increase by 10 percentage points
each year to reach 100 percent on January 1,
2019. In times of financial stress, banks will be
allowed to fall below the minimum by using
their stock of HQLA.
The NSFR requires banks to maintain a
stable funding profile in relation to their onand off-balance sheet activities.92 In October
2014, the Basel Committee issued the final
NSFR, which among other provisions covered
the required stable funding for short-term
exposures to banks and other financial institutions and for derivatives exposures.93 The
NSFR will become a minimum standard by
January 1, 2018.
In the United States, in September 2014
the Federal Reserve, the OCC, and the FDIC
issued the final version of the Liquidity
Coverage Rule, which requires the largest
internationally active banks94 to maintain
enough HQLA, such as cash or treasury bonds,
to fund themselves for 30 days during a crisis,
which could require some banks to hold more
liquid assets.95 The Federal Reserve said the
largest banks would need to hold $1.5 trillion
in highly liquid assets by 2017, about $100
billion more than they do today.96 Banks with
more than $250 billion in assets will eventually
have to calculate their liquidity needs daily.97
Banks have made less progress in meeting the Basel liquidity ratios than in complying with the capital requirements. Sixty-nine
percent of respondents said their bank already

meets the liquidity ratios, while another 26
percent said they expect to meet them well
before the deadlines. Since the Basel III
liquidity requirements have been issued more
recently, most banks are still developing the
capabilities and operational infrastructure
needed to comply.
Banks should also consider their organizational structure to manage liquidity. Although
regulatory requirements for liquidity and
capital are both designed to increase safety and
soundness, these areas are typically managed
separately, with information systems that are
not integrated. Banks could benefit by developing a consistent approach to evaluate liquidity
and capital requirements.
Basel III challenges

The issues that pose the greatest challenges
for banks in complying with Basel III concern
data and information systems. Respondents
most often considered data management (56
percent) and technology/infrastructure (55
percent) to be extremely or very challenging in
implementing these new requirements (figure 12). It can also be difficult to understand
clearly what Basel III demands. Forty-four
percent of respondents said the clarity/expectations of regulatory requirements for Basel III is
extremely or very challenging, although this
figure declined from 53 percent in 2012.
A related issue is that banks must manage multiple Basel III requirements in such
areas as the minimum capital ratio, Common
Figure 12. How challenging for your organization is each of the following aspects of implementation
of Basel III reforms?
Data management
56%
Technology/infrastructure
55%
Clarity/expectations of regulatory
requirements
44%
Strict deadlines
26%
Internal resources/capabilities and

budget
26%
Functional reorganization/
integration
23%
Home/host supervision
23%
Program/implmentation
management
Business realignment
18%
17%
Note: Figures represent the percentage of respondents identifying each item as extremely or very challenging. Percentages were
calculated on a base of respondents at institutions subject to Basel II/III or that have adopted it.
33
Equity Tier One ratio, NSFR and LCR leverage

ratios, and G-SIB requirements, among others.
Not only have they served to increase compliance costs, banks often struggle to develop
a consistent approach to complying with

the diversity of requirements, in part due to
divided responsibilities and to the difficulty of
obtaining aggregated, high-quality risk data.
LEADING PRACTICES IN BANKING RISK MANAGEMENT

There have been many areas where expectations have risen and banks have enhanced risk
management capabilities. Some of the leading practices and other important areas for banks to
consider include:
Strengthening risk governance by enhancing the board risk committee with a board risk expert and
independent directors
Providing effective challenge of the risk and capital management processes by the board risk
committee
Enhancing the banks risk appetite framework and statement in ways that clearly articulate the
business activities the firm is willing to engage in and the types and levels of risk it is willing to
assume throughout the organization
Integrating the assumptions used in strategic planning, capital planning, and risk management
Improving risk culture and conduct risk management by establishing clear business practices
guidance and oversight mechanisms
More fully integrating risk management into the compensation process by enhancing risk-based
incentive structures for management and risk-taking personnel
Operationalizing enterprise-wide stress-testing infrastructure and capabilities into bank business-asusual processes
Evaluating impact of and planning for proposed revisions to regulatory capital calculation
methodologies
Integrating liquidity and capital management planning processes
Strengthening the banks three lines of defense framework by better defining roles and
responsibilities of each, including escalation procedures, to provide appropriate checks and balances
that are well understood and implemented across the organization
Building capabilities to practically implement and operate recovery and resolution plans across
business areas
Enhancing the model development and validation framework and capabilities to cover all models of
the bank that drive finance, risk, and capital results
Evaluating and improving end-to-end risk and finance data from transaction origination and
reference data to analytics, aggregation, and reporting
34
Sector spotlight: Insurance
HE impacts of regulatory reform on insurers have been significant. According to

a Deloitte analysis, the European insurance
industry spent between $5.7 and $6.6 billion
in 2012 to comply with new regulations being
phased in from 2012 to 2015, and similar
amounts had been spent in the two previous
years.98 For European insurers, these costs were
equivalent to a 1.01 percent point impact on
return on equity (ROE). Fundamental regulatory reform is also underway in the United
States and internationally, as led by the IAIS.
Movement toward groupbased regulation

While regulation in Europe regulates insurers on a consolidated group basis, regulation in
some jurisdictions is on a legal-entity basis. For
example, insurance regulation in the United
States has been the domain of the individual
states, which regulate the legal entity operating
in their state. There is now a movement in the
United States and elsewhere to increase groupbased supervision.
The US Federal Reserve has been given
additional regulatory authority over insurers. In addition to its regulatory authority
over bank holding companies, which may
include insurance operations, it also regulates
insurance companies designated as systemically important, and it has now designated
three insurance companies as SIFIs. Both the
Federal Reserve and the NAIC are reviewing approaches for a group insurance capital
standard. The first US insurers likely to be
affected by the trend toward group-based
supervision are those that conduct business in

multiple jurisdictions or have a nature, scale,
size, or complexity that attracts additional
regulatory expectations.
In addition to the movement toward
group-based supervision, regulators have also
required insurers to implement ERM programs. Insurers have responded by taking a
total balance sheet view of risk, which assesses
all the risks across the enterprise. Among the
insurance companies participating in the survey, 95 percent either have an ERM program
(73 percent) or are currently implementing one
(22 percent).
Regulators are also encouraging insurance
companies to adopt stronger risk governance
practices such as creating a CRO position,
and this was reflected in the survey results.
All the insurance institutions participating in the survey reported having a CRO or
equivalent position.
Increased capital requirements

As with banks, insurers are facing increased
regulatory capital requirements. In Europe,
Solvency II is a capital adequacy regime
developed by EU regulators for insurance
companies, which is due to come into effect
on January 1, 2016. The goal of the initiative
is to implement solvency requirements that
better reflect the risks companies face, as well
as develop a system that is consistent across
all member states. As with Basel II, Solvency
II has a three-pillar structure addressing
quantitative capital adequacy requirements,
supervisor review, and market discipline.
Solvency II is requiring European insurers
35
to assess comprehensively all their risks and

consider stress scenarios when assessing
capital adequacy.
Countries in Asia-Pacific are also moving toward adopting Solvency II including
Australia, Japan, Malaysia, and Taiwan.99
At the international level, the IAIS is
developing a risk-based group-wide global
Insurance Capital Standard (ICS) for global
systemically important insurers (G-SIIs) and
for Internationally Active Insurance Groups,
which is due to be completed by the end of
2016. In addition, global G-SIIs will have a
High Loss Absorbency (HLA) layer of additional capital. It is not clear at this stage of the
consultation process what the HLA will look
like and whether this additional capital layer
will focus on any non-traditional insurance
activity or extend beyond this, but any additional layer of capital will provide a further
bite from regulators. The second round of
IAIS Field Testing will commence at the end of
April 2015, and this should further help inform
the Basic Capital Requirement (BCR), ICS,
and the HLA. Field Test participants will help
provide insights to regulators as they develop
these standards.
Roughly 60 percent of survey respondents
reported that their institution was either subject to Solvency II requirements or to equivalent revised regulatory capital requirements.
Among these respondents, the area cited
most often as a planned area of focus related
to Solvency II was Own Risk and Solvency
Assessment (ORSA) (87 percent). Regulatory
authorities are requiring insurance companies to regularly perform ORSAs to assess
their capital adequacy and solvency and then
to report the results. This requirement is one
of the most important regulatory changes in
decades for insurance companies and involves
taking a forward-looking, holistic assessment
36
of risk and its expected impacts. US insurers are required to file ORSAs with their state
regulators. Other regulators around the world
are also at different stages of development in
this area.
Issues related to risk data are additional
areas of attention since few insurers have
invested sufficiently in data quality, data aggregation, and advanced analytics, with many still
relying on manual processes. The issue cited
second most often was data infrastructure and
data handling processes, mentioned by 78 percent of respondents, up sharply from 31 percent in 2012. On the other hand, 57 percent of
respondents mentioned review of the quality of
the data used, down from 77 percent in 2012.
Assessing insurance risk

Respondents said the most common
approach to assessing insurance risk is actuarial reserving, which is used by 91 percent of
institutions, including 64 percent that use it
as a primary methodology. The second most
common method is regulatory capital, used by
87 percent of institutions, including 59 percent
that use it as a primary methodology (figure
13).
Stress testing is also widely used. Seventyeight percent of insurance respondents said
their institution uses stress testing to assess
insurance risk, either as a primary methodology (36 percent) or a secondary methodology
(42 percent).
Among respondents at insurance firms that
conduct stress testing, the insurance risk factor
on which they most often conduct stress tests
is interest rate (94 percent), followed by mortality (67 percent) and lapse (61 percent). Less
than half of insurance respondents said their
institution performs stress testing on property
and casualty claim cost (48 percent) or morbidity (45 percent).
Figure 13. To what extent does your company use the following methods to assess insurance risk?
Actuarial reserving
64%
Regulatory capital
42% 78%
36%
Claims ratio analysis
37%
Asset adequacy analysis
37%
Value at risk
32%
Value of new business
Stochastic embedded value
34% 75%
41%
Economic capital
Dynamic financial analysis
28% 87%
59%
Stress testing
Market consistent embedded value
27% 91%
34%
22%
29% 66%
20% 57%
19%
16% 50%
22% 44%
26% 42%
16%
25%
51%
Primary methodology
Secondary methodology
13% 38%
Note: Percentages were calculated on a base of respondents at institutions providing insurance or reinsurance services.
37
LEADING PRACTICES IN INSURANCE RISK MANAGEMENT

As global regulatory bodies and boards of directors increasingly turn their attention to how insurance
entities are managing risk, there are a number of areas where insurers should focus their efforts to
meet these challenges.
Finalizing development and implementation of a sustainable ORSA process that is fully integrated
into business strategy and decision making
Improving linkages of quantitative risk measures to risk limits and tolerances implemented in business
operations
Enhancing methods to measure and react to emerging reputational and strategic risks
Establishing improved risk governance to reflect increased regulatory expectations for an effective
second line of defense risk management function
Continuing to monitor and evaluate potential impact of proposed insurance regulatory group capital
standards
Advancing current methods for evaluating operational risk through development of enhanced
key risk indicators, more robust loss event data collection, and industry-appropriate quantitative
measurement methodologies
Investing in risk data quality and systems to enable more effective risk monitoring, reporting, and
analytics
Further strengthening risk culture by embedding risk management in business strategy and adding
insights into risk-taking activities
38
Sector spotlight: Investment

management
T
Investment management firms are typically strong in managing market risk since
this is central to their business. Many are now
addressing risk management areas where
they may not be as strong such as IT applications, data management, and oversight of the
extended enterprise. Respondents were asked
to rate how challenging each of a series of
issues is for the investment risk management
function in their organization (figure 14).
HE investment management sector is

diverse, comprising not only large and
boutique stand-alone asset management firms
but also subsidiaries of diversified banks and
insurance companies. Depending on their
structure, investment management operations
can be subject to a variety of requirements
imposed by regulators for the parent banking
or insurance company.
Respondents from investment management firms were asked how their organization assesses investment risk. By far the most
common approach is performance attribution against a benchmark (97 percent). Other
measures are employed by half or more of
investment management institutions: mandate
breaches (72 percent), absolute return (69 percent), and Sharpe ratio (50 percent).
Risk technology and data

The technology and data used to monitor
and manage risk continue to be top priorities
and concerns for investment management
firms. In the period following the global financial crisis, many asset managers investments
Figure 14. How challenging is each of the following for the investment risk management function in
your organization?
38%
55%
48%
42%
41%
IT applications
and systems
Regulatory
compliance
Data management
and availability
Third-party service
provider
oversight
33%
30%
24%
Resourcing
Analytics and
reporting
Risk
governance
Note: Figures represent the percentage of respondents identifying each item as extremely or very challenging. Percentages were
calculated on a base of respondents at institutions that provide investment management services.
39
in risk technology reflected a best-of-breed

approach, addressing gaps in coverage and
the depth of risk analytics across asset classes
and products through the use of multiple risk
engines or service providers. Increasing the
depth and coverage of risk analytics addressed
one need but inadvertently created additional
issues by increasing the sources and volume
of risk data. The proliferation of risk data has
challenged the ability of asset managers to
aggregate risk measures and exposures across
multiple products, funds, and strategies to
achieve a holistic view of risk.
Further magnifying this challenge is the
demand by regulators for additional data
and reporting by asset managers. In Europe,
the Alternative Investment Fund Managers
Directive (AIFMD) established detailed
requirements for reporting liquidity, risk
profiles, and leverage. US pension funds are
now subject to accounting regulatory changes
that have prompted a need for significant
enhancements in data quality and analysis.
Additionally, recent remarks by a member of
the Board of Governors of the Federal Reserve
in the United States point to the focus of
both the FSB and the FSOC on assessing the
magnitude of liquidity and redemption risk
within the asset management sector as a tool
for macro-prudential regulation.100 This will
require many asset managers to invest in their
capabilities around liquidity risk measurement
and monitoring.
Some institutions have invested in data
warehouses in an effort to improve the availability and quality of risk data, but have faced
the challenge of making sure the data placed
into them are clean and accurate. Some
organizations have not implemented errordetection processes or assigned responsibility for data quality when creating their data
warehouses. As a result, data governance is
emerging as an important focus for investment managers, and some organizations have
created a chief data officer position to help
address it.
With the increasing complexity of risk data
infrastructure and the focus of regulators on
40
risk technology and data, it is not surprising that significantly greater percentages of
respondents said they consider these issues
to be extremely or very challenging for their
investment management activities than was
the case in 2012. The issue most often rated as
extremely or very challenging was IT applications and systems (55 percent up from 23
percent in 2012), while data management and
availability was cited third most often (42 percent up from 35 percent). Although 30 percent
of respondents considered risk analytics and
reporting to be extremely or very challenging,
88 percent said it is at least somewhat challenging, an increase from 71 percent in 2012.
Regulatory compliance
With greater scrutiny from regulators, 48
percent of investment management respondents considered regulatory compliance to
be extremely or very challenging, up from
29 percent in 2012. Investment management
firms have been subjected to a variety of new
regulatory requirements. The SEC is paying
greater attention to investment managers and
funds including introducing expanded stress
testing, more robust data reporting requirements, and increased oversight of the largest
institutions.101 In 2014, the SEC also amended
its rules to require a floating net asset value for
institutional prime money market funds.102 In
Europe, the AIFMD introduced new regulations governing the marketing of funds and
deal structure for private equity and hedge
funds operating in the European Union.103
These and other new regulations affect
a wide range of risk management issues for
investment management firms.
Governance and accountability

Regulators expect investment management
firms to implement strong governance of their
risk management programs.104 Investment
management firms need to clearly define the
roles, responsibilities, and decision-making
authority across the three lines of defense to
help ensure there are no ambiguities that can
create gaps in control or a duplication of effort.

In particular, stand-alone investment management firms may need to reexamine the role
of the boards of directors of their funds, their
committee structure, and the process in place
to identify and escalate key risks.
Compliance risk
management program
Investment management firms should have
a rigorous program in place to identify and
manage evolving compliance risks. The objective of a compliance risk management program
is to help ensure the firm is in compliance with
regulatory guidelines and is making consistent
and accurate disclosures related to business
practices and conflicts of interest. Firms should
periodically evaluate the effectiveness of their
compliance program including examining such
issues as the following: governance and the use
of the three lines of defense risk governance
model; supporting infrastructure (including
human resources, business processes, and technology); management of third-party providers;
the organizations risk culture; management of
conflicts of interest; strength of internal controls; accuracy and consistency of disclosures
and communications; integration of compliance risk management with ERM; and the
understanding by the organization and its personnel of how fiduciary duty is implemented.
Investment compliance monitoring

Investment management firms can benefit
from an investment compliance monitoring
program. Such a monitoring program can help
identify and address any breakdowns in controls used to comply with regulatory requirements, operational inefficiencies regarding
trade monitoring, inconsistent or inadequate
processes used to monitor client portfolios,
and inconsistent data usage or poor processes
to integrate new data.
Conflicts of interest
Reducing conflicts of interest among
investment management and other financial
institutions is a priority for regulators around
the world. The SEC announced that one of its

examination priorities for 2015 would be to
assess the risks to retail investors including
such issues as fee selection, sales practices,
suitability of investment recommendations,
and products offered by alternative investment
companies.105 In January 2015, the OCC issued
a handbook for use by its examiners regarding conflicts of interest among banks that offer
investment management services.106 In Europe,
the Markets in Financial Instruments Directive
(MiFID) II requires that investment firms put
in place organizational and administrative
procedures with a view to taking all reasonable steps to prevent conflicts of interest.107 In
an effort to increase transparency for clients, in
December 2014, the European Securities and
Markets Authority (ESMA) recommended to
the EU Commission that portfolio managers
only be able to accept broker research where
they pay for it directly or from a research
account funded by a specific charge to their
clients.108 In the United Kingdom, the Financial
Services Authority requires that investment
management firms must manage conflicts of
interest fairly and that their boards of directors
must establish effective frameworks to identify
and control conflicts of interest.109
Conflicts of interest can affect nearly all
aspects of investment management including product development, client on-boarding,
portfolio management, personal trading, and
managing service providers. Investment management firms may need to enhance their processes to identify, record, analyze, and disclose
conflicts of interest. Since conflicts of interest
can arise as regulations change and a firms
products and strategies evolve, it is helpful to
conduct a compliance review at least annually
to identify any new conflicts of interest that
may have arisen.
Client on-boarding
In Deloittes experience, many compliance
violations can be traced back to the client onboarding process. Know your customer and
customer classification requirements are incorporated into numerous regulations including
41
MiFID II, European Market Infrastructure

Regulation (EMIR), the Dodd-Frank Act,
and the Foreign Account Tax Compliance
Act (FATCA). In August 2014, the Financial
Crimes Enforcement Network (FinCEN)
published proposed rules that would enhance
customer due diligence requirements to identify and verify the identity of an institutions
customers and beneficial owners.110
As investment management firms and
their products become more complex, it can
be difficult and time-consuming to monitor whether guidelines have been followed as
new clients are acquired. In some institutions,
business functions or lines of business may
be segregated, making it difficult to access
complete information on client accounts.
Investment management firms need an integrated structure that provides clear authority
for and transparency into decision-making;
cross-functional participation in product
development; a strong technology infrastructure that supports analytics and monitoring
of client and product profitability; and strong
governance and oversight of the on-boarding
process. Given the complexity of the task, institutions can benefit from automated compliance systems that work in tandem with strong
manual oversight when setting up accounts for
new clients.
Cybersecurity
Cybersecurity has been an increasing focus
of regulators that supervise institutions of
all types, including investment management
firms. (See Operational risk section for a
discussion of this issue.)
Model risk
Regulators are scrutinizing the models used
by financial institutions including investment
managers. The SEC charged several entities of
one firm with securities fraud for concealing
a significant error in the computer code of the
quantitative investment model that it used to
manage client assets.111
Model risk can arise in a number of different areas, including investment decision
42
making, trade implementation and monitoring, exposure management, and performance

evaluation. Institutions should examine the
oversight of their models and the responsibilities, policies, and procedures; validate models; employ ongoing monitoring programs;
and increase the rigor of their process for
developing models.
Extended enterprise risk

Managing the risks from third-party service
providers across the extended enterprise is a
growing concern. Third-party service provider
oversight was considered to be extremely or
very challenging for the investment management risk function by 41 percent of respondents, almost double the 21 percent in 2012.
Third parties can pose risks for many different risk types such as cyber, financial, credit,
legal, strategic, operational, and business
continuity. Adverse events in any of these areas
can damage a firms reputation, undermining
its ability to attract and retain clients and assets
under management. The potential negative
impacts of a risk event at a third party can
quickly extend to an institutions reputation
and are only magnified today as social media
and globalization catapults news around the
world at lightning speed.
The impact of third parties on cyber
security is a particular concern. Cyber threats
continue to increase, and third parties are
often their point of entry. One analysis across
multiple industries found that attackers gained
access through third-party systems in 40 percent of data breaches.112
There are a number of reasons for the
increased focus on extended enterprise risk.
Although the use of third parties by investment
management firms is not new, it has become
increasingly pervasive and complex as the
emergence of unbundled services has created
more diverse options to outsource specific
functions or sub-functions. As firms continue
to search for efficiency and focus on their core
competencies, the expanded use of third parties is appealing to more areas of the business.
Managing the risks posed by third parties

is also more complex than ever before. Third
parties may in turn subcontract some of their
services to additional providers, making it difficult for investment management firms to gain
visibility into the risk management practices
of these sub-service providers (also referred to
as fourth parties) and raising the potential
for concentration risk if several of their third
parties use common sub-service providers.
Adding to the complexity, more intermediaries that distribute funds, such as broker/
dealers, are also becoming service providers
by employing an omnibus accounting model
in which they maintain account information
and transaction histories for their customers
through sub-accounting systems and charge
for these services. Finally, even when an
investment management firm has a third-party
relationship with an affiliated entity within the
same parent company, it must still take steps to
assess the effectiveness of the affiliated entitys
risk management program and controls,
keeping in mind the potential for conflicts
of interest.
Regulatory authorities have increased their
attention to third-party risk. For investment
management operations that are subsidiaries
of banks, the Federal Reserve and the OCC are
focused on the risks posed by these relationships in such areas as consumer protection and
business continuity.113 US banking regulators
expect that effective risk management of thirdparty relationships will include written contracts and plans that outline the banks strategy,
identify the inherent risks of the activity, and
detail how the bank selects, assesses, and
oversees the third party. The SEC has required
investment companies to designate a chief
compliance officer who reports to the board of
directors, and one of their duties is to oversee
the compliance programs of the organizations
service providers.114 The SEC has also focused
on the omnibus and intermediary fee payment
models to assess distribution in guise conflicts as well as board and fund management
oversight of these arrangements.
The SECs 2014 examinations focused on

cybersecurity and encompassed vendors that
have access to an institutions networks, customer data, or other sensitive information.115
The Financial Industry Regulatory Authority
(FINRA) announced that outsourcing will be
a priority area of review for its 2015 examinations, including an analysis of due diligence
and risk assessment of third-party providers and the supervision of activities that are
outsourced.116 The COSO framework stresses
that organizations retain full responsibility for
managing the risks associated with engaging
third parties and must implement a program
to evaluate the effectiveness of their system of
internal control over the activities performed
by their service providers.117
The foundation of an effective program is
to consider how the institutions existing risk
management governance and strategy can
be leveraged to enhance transparency and
accountability for third-party risk. The board
of directors and the executive committee
should be actively involved in overseeing the
strategy and direction of the effort. In developing a third-party risk management strategy,
challenges include clearly defining roles and
responsibilities for managing third-party risks
across the three lines of defense, assigning
responsibility for leading the program, and
ensuring accountability.
Some organizations focus only on specific
aspects of third-party relationships, such
as procurement. But investment management operations need to develop a holistic
approach to extended enterprise risk that
encompasses the entire lifecycle of thirdparty relationships from initial procurement
through contracting, service-level agreements,
implementation, metrics, monitoring, and
off-boarding. Considering the risk management aspects associated with each of these
stages in the lifecycle of third-party relationships may lead institutions to rethink their
current approaches. For example, in selecting
and evaluating potential vendors, selection
criteria should include not only cost but also
such issues as the providers risk management
43
program and transparency. Ongoing monitoring should encompass the effectiveness of the
vendors risk management program and how
they are managing emerging risks.
Institutions can benefit from having established processes and a set schedule with which
to assess these risks. Most respondents at
institutions providing investment management
services said they review the risks from their
relationships with different types of vendors
at least annually: administrators (89 percent),
technology vendors (75 percent), custodians
(68 percent), distributors (65 percent), transfer
agents (62 percent), and prime brokers (73
percent). The type of vendor relationship that
is least often subjected to an annual review is
consultants (55 percent).
Institutions should create an inventory of
all their third-party relationships and develop
a formal process to assess and rank them based
on the importance of the services provided and
the risks associated with each relationship. As
part of this examination, the assessment should
identify the material, non-public information
about the institution and the personal identifying information regarding customers that each
third party has access to.
Leading practices, including the OCC
framework, include segmenting third-party
providers based on risk rankings such as low,
medium, high, and critical. Although it is
important for institutions to focus on critical relationships, an effective third-party risk
management program should evaluate and
oversee to some extent the risks posed by all
third parties. Institutions should assess the
trade-offs between the level of risk posed by
44
each of its third parties and the cost, both in

time and money, to monitor and manage the
risks associated with each relationship.
Resourcing
Resourcing of the investment management
risk management function was considered to
be extremely or very challenging by 33 percent
of respondents (roughly similar to 29 percent
in 2012). Managing resource constraints is a
perennial issue and investment management
organizations are increasingly shifting to riskbased resourcing, which allocates resources
to key areas based on strategic risk assessments. This approach can maximize impact
and value by taking a holistic view of where
the organization faces the greatest risk and
where additional resources can help meet its
strategic goals. It can also identify gaps in skills
and inform hiring decisions to more effectively
manage key risk areas.
Risk governance
Many investment management firms are
examining the role of the board of directors
in overseeing risk, including which issues and
decisions should be referred to the full board.
They are also considering which management
committees should be established to manage
risk and how to implement an effective process
to identify and escalate key risks. While 24
percent of respondents said risk governance
is extremely or very challenging for their
investment management function, 85 percent
described it as at least somewhat challenging.
LEADING PRACTICES IN INVESTMENT MANAGEMENT

As is true across other parts of the financial services industry, the risk management practices of asset
management firms are evolving and under increasing scrutiny. Some of the leading practices and other
important areas for investment management firms to consider include:
Governance
Reexamining and fine-tuning the mandate and responsibilities of boards of directors and the
structure of management committees to help increase their effectiveness in overseeing and
managing risks
Identifying key risks and implementing effective oversight, including appropriate escalation and
reporting practices
Reviewing the three lines of defense and the roles and responsibilities of each
Behavior
Promoting risk culture by establishing clear business practices, guidance, and oversight mechanisms
Reviewing methods to identify new and changing conflicts of interest
Enhancing client on-boarding processes to help promote regulatory compliance and risk
management in an increasingly complex global environment
Execution
Implementing a comprehensive extended enterprise risk management program that allows for more
effective risk management of third-party providers
Enhancing investment compliance monitoring to improve risk identification, increase operational
efficiencies, and improve the client experience
Conducting trade analytics to improve overall monitoring and surveillance and to identify areas of
improvement
Infrastructure
Strengthening the overall effectiveness of data management as a key enabler for risk management
and reporting
Increasing the maturity of cyber risk programs to accommodate the evolving threat landscape and
integrating cyber risk oversight into the extended enterprise (third-party providers)
Addressing the limitations of aging infrastructure to more effectively manage risk in an increasingly
complex and global operating environment
45
Management of key risks
HEN asked to assess how their institution manages risk overall, 75 percent
of respondents felt it was extremely or very
effective, similar to the results in 2012. The
reason may be that there have been no major
stresses since the global financial crisis to challenge the belief that institutions are managing
risk effectively.
Respondents were most likely to consider
their institution extremely or very effective
Figure 15. How effective do you think your organization is in managing each of the following types
of risks?
Credit
92%
Asset and liability
89%
Liquidity
89%
Counterparty
80%
Market
80%
Property and casualty*
76%
Regulatory/compliance
76%
Budgeting/financial
73%
Mortality*
73%
Morbidity*
70%
Country/sovereign
68%
Reputation
66%
Lapse*
61%
Strategic
60%
Operational
56%
Catastrophe*
56%
Systemic
Geopolitical
55%
47%
*Asked of respondents at institutions that provide insurance or reinsurance services.

Note: Figures represent the percentage of respondents rating their organization effective or very effective in managing each
type of risk.
46
in managing more traditional risk types such

as credit (92 percent), asset and liability (89
percent), liquidity (89 percent), counterparty
(80 percent), and market (80 percent). For
these risk types, institutions typically have
more well developed risk methodologies, data,
and infrastructure. In addition, regulatory
requirements and expectations are well defined
and understood.
Fifty-six percent of respondents considered their institution to be extremely or very
effective in managing operational risk, which
reflects the fact that operational risk is a
diverse risk type firms find difficult to define
and measure.
Respondents also gave lower ratings as
being extremely or very effective to several
other risk types: country/sovereign (68 percent),
reputation (66 percent), strategic (60 percent),
systemic (55 percent), and geopolitical (47
percent). These risk types are newer, and as a
result there are fewer accepted methodologies
and tools, risk data may not be available, and
regulatory expectations are less clearly defined.
Respondents were asked which three risk
types they believed would increase the most in
importance to their institution over the next
two years. Given the depth and breadth of
regulatory change, it was not surprising that
the risk type most often ranked among the
top three was regulatory/compliance risk (51
percent) (figure 16).
The risk type cited next most often as
increasing in importance was cybersecurity
risk (39 percent). Although many respondents
expected cybersecurity risk would be one of
the risks to increase most in importance over
the next two years, only 42 percent felt their
institution is extremely or very effective in
managing it.
Although credit risk is a mature risk type,
there are a number of reasons that may explain
why 26 percent of respondents felt it would
be one of the risk types to increase the most
in importance over the next two years. Credit
risks are cyclical, and there are increased
concerns over the economic slowdown in
Europe and emerging markets. In the United
We expect that not only

do we need to continue
to improve our ability to
manage risk but also, maybe
more importantly, we have
to improve our ability to
demonstrate that we have
managed the risk. You can
add the best internal controls
in the world but if you didnt
have the documentation to
prove the controls exist, it
doesnt mean anything.
Director of enterprise risk management, insurance
States, banks have abundant liquidity and some

have sought to improve earnings and increase
returns by extending credit to borrowers with
lower credit quality.
Credit risk
Regulators are expecting financial institutions to closely monitor their credit exposures,
which can be a formidable task. The credit risk
issue most often rated as extremely or very
challenging by respondents was obtaining sufficient, timely, and accurate credit risk data (33
percent). This issue poses a greater challenge at
small institutions (46 percent) than at mid-size
(35 percent) or large institutions (25 percent).
Institutions need to aggregate their risk data
and calculations across the enterprise to gain
a consolidated view of overall credit risk, and
this was the area cited next most often. Thirtyone percent of respondents said consistently
47
Figure 16. Over the next two years, which three risk types do you think will increase the most in
their importance for your business?
Regulatory/compliance
51%
39%
Cybersecurity
Strategic
28%
Credit
26%
Data integrity
23%
19%
Operational
Liquidity
17%
16%
Market
Asset and liability
14%
Reputation
Business continuity/IT security
12%
10%
Note: Only the highest-rated risk types are shown. Figures reflect the percentage of respondents who ranked each risk type in
the top three.
aggregating the results of credit risk calculations

across portfolios and business areas is extremely
or very challenging.
These activities are especially demanding
for larger institutions that have multiple lines
of business and operate in numerous geographic markets. The degree of difficulty ramps
up after mergers, when an institution must
integrate the acquired institutions data, which
may not be in a comparable format and may
cover a different time period than its existing
credit risk data.
Market risk
Market risk is a mature risk type with
generally well-developed methodologies, and
relatively few respondents considered specific
issues to be challenging. The issue most often
considered to be extremely or very challenging
48
was obtaining sufficient, timely, and accurate

market risk data (23 percent), followed by
aligning market risk management with overall ERM program (20 percent). In contrast to
credit risk, only 12 percent of respondents
considered aggregating the results of market risk
data calculations across portfolios and business
areas to be extremely or very challenging in
managing market risk.
Liquidity risk
Respondents reported greater challenges
in managing liquidity risk. Regulators have
focused on this issue due to the liquidity difficulties many institutions experienced during
the global financial crisis. Since these regulatory requirements are relatively recent, many
institutions have less mature infrastructure and
procedures for liquidity risk than for credit and

market risk.
The two issues cited most often as extremely
or very challenging concerned complying with
Basel III liquidity requirements: investment
in operational and other capabilities to comply with the Basel III NSFR (40 percent) and
investment in operational and other capabilities
to comply with the Basel III LCR (31 percent)
(figure 17).
Roughly one-third of respondents said that
developing a credible set of systemic and idiosyncratic liquidity stress scenarios is extremely or
very challenging. Finally, risk data was also a
concern, with 31 percent of respondents saying
that obtaining sufficient, timely, and accurate
risk data is extremely or very challenging.
Asset liability management

Although asset liability management
has been a longstanding process at many
institutions, conducting the sophisticated

analyses and forecasts is complex. The issue
cited most often as extremely or very challenging for asset liability management was ability
to model on a dynamic basis the impact on net
interest income of changing interest rates and
changing balance sheet (29 percent).
Obtaining asset liability risk data is also a
challenge at some institutions. The issue rated
third most often by respondents as extremely
or very challenging was obtaining sufficient,
timely, and accurate asset and liability data (24
percent).
Operational risk
Operational risk is a difficult risk to
measure and manage, with a wide range of
potential operational risk events and where
loss data are not easily available. Operational
risk is an area of focus both for regulators and
the industry.
Figure 17. How challenging is each of the following for your organization in managing liquidity risk?
Investment in operational and other capabilities to comply
with the Basel III NSFR (Net Stable Funding Ratio)
40%
Developing a credible set of systemic and

idiosyncratic liquidity stress scenarios
32%
Obtaining sufficient, timely, and accurate risk data
31%
Investment in operational and other capabilities to comply

with the Basel III LCR (Liquidity Coverage Ratio)
31%
The quantification of the liquidity stress scenarios
27%
Controlling the consumption of liquidity on a daily basis

across the whole firm
23%
22%
Cash flow forecasting

Establishing and then monitoring
liquidity risk appetite
18%
Establishing a contingency funding plan
16%
Managing any other key balance sheet ratios, e.g.,

customer loans/customer deposits
15%
49
I see the need for more focus

on operational risk, including
reputation and litigation risks.
In response, we need to do
better modelingperhaps
thinking about it in a different
way than we have in the
traditional sense of managing
operations risk.
Senior risk officer, banking
Respondents most often said their institution places an extremely or very high priority
on managing three types of operational risk
events: clients, products, and business practices (74 percent up from 52 percent in 2012);
business disruption and system failures (74

percent up from 46 percent); and execution,
delivery, and process management (74 percent
up from 45 percent).
When it comes to operational risk methodologies, respondents most often considered
them to be extremely or very well developed
at their institution for risk assessments (60 percent), internal loss event data/database (48 percent), risk and capital modeling (45 percent),
and key risk indicators (42 percent) (figure 18).
Some methodologies received much lower
ratings. Only one-third of respondents felt
that their institutions external loss event data/
database is extremely or very well developed,
and 30 percent said the same about causal
event analysis.
Most respondents considered their organization to be extremely or very effective in managing the more traditional types of operational
risk types such as legal (70 percent), regulatory/
compliance (67 percent), and tax (66 percent).
In contrast, fewer respondents considered their
institution to be extremely or very effective
at managing other types of risks including
Figure 18. How well developed are each of the following operational risk management
methodologies at your organization?
60%
Risk assessments
Internal loss event data/database
48%
Risk and capital modeling
45%
42%
Key risk indicators

Scenario analysis
External loss event data/database
Scorecards
Causal event analysis
34%
33%
32%
30%
Note: Figures represent the percentage of respondents identifying each item as extremely or very well developed.
50
third-party (44 percent), data integrity (40

percent), and model (37 percent).
Cybersecurity
Cybersecurity is an operational risk type
that has become a high priority for financial
institutions and regulators. The number and
extent of cyber attacks have shown exponential growth118 according to one corporate
security chief, with the financial services
industry as a top target.119 In response, doubledigit increases in bank security budgets are
expected in the next two years.120 Once seen as
only an IT issue, the impacts of cyber attacks
can spread across the organization and affect
business lines, operations, legal, and communications, among other areas. With their widespread impacts, cybersecurity events also pose
significant reputational risks to a company.
With the increase of major hacking incidents, from both criminal enterprises and
potentially state-sponsored actors, cybersecurity has been a major focus for regulators. In
February 2015, the SECs Office of Compliance
Inspections and Examinations released the
results of its examinations in 2014 of cybersecurity practices at more than 100 registered
broker-dealers and investment advisers.121
In the same month, FINRA published its
recommendations on effective cybersecurity
practices, based on its 2014 examinations of
member firms.122 FINRA has announced that
cybersecurity will again be one of its examination priorities in 2015.123
Given the increasing regulatory requirements and the potential reputational damage
that can result from a data breach, financial
institutions need a comprehensive cybersecurity program. Among the leading practices
for such a program are that it places a priority
on threats with the greatest potential impact
and on safeguarding sensitive data and critical
infrastructure; implements a formal written
plan to respond to cybersecurity incidents;
conducts penetration testing; has dedicated
personnel; and periodically reviews the firms
cyber insurance strategy.
Forty-two percent of respondents felt their

institution is extremely or very effective in
managing cybersecurity, roughly similar to the
percentage who said the same about managing third-party risk (44 percent). Third-party
and cybersecurity risk are sometimes closely
related since there have been security breaches
involving third parties that have affected the
confidentiality of customer information.
Respondents at large institutions (63 percent), which have more resources to devote
to safeguarding their data and information
systems, were more likely to consider their
organization to be extremely or very effective
in this area than those at mid-size (35 percent)
or small institutions (25 percent).
Regulatory risk
The wave of change since the global financial crisis has constituted the most far-reaching
revision of regulatory requirements in decades,
significantly increasing compliance requirements. The era of regulatory reform is far
from over, with additional proposals from the
Basel Committee and with final rules still to be
established for many provisions of the DoddFrank Act in the United States and for the
CMU and the EU Regulations and Directives
in Europe.
The impacts of these more stringent regulatory requirements are significant for many
institutions, including higher capital requirements, restrictions on business activities,
additional documentation for regulators, and
new standards on risk data and infrastructure.
Regulators are also turning their attention to
qualitative issues, such as risk culture and the
effectiveness of internal controls.
One result of all these regulatory requirements has been increased costs. When asked
about the impacts of regulatory reform on
their institution, respondents most often mentioned noticing an increased cost of compliance
(87 percent up from 65 percent in 2012) (figure
19). Other impacts cited often were maintaining higher capital (62 percent up from 54
percent in 2012) and adjusting certain products,
51
For global organizations, a huge challenge is trying to

manage responses to regulations across different regulators
and jurisdictions. While we tend not to see regulators
totally contradicting one another, the pace of regulatory
change is often quite different in different regions, and that
makes things more challenging for us.
lines, and/or business activities (60 percent up

from 48 percent).
Many respondents are concerned that
compliance costs will continue to escalate.
Considering the potential impact on their
organization of supervisory and regulatory processes, respondents were most often
extremely or very concerned about issues
related to cost: tighter standards or regulations
that will raise the cost of doing existing business
(72 percent) and growing cost of required documentation and evidence of program compliance
(60 percent).
The impacts of examinations and enforcement actions were also mentioned by many
respondents: regulators increasing inclination
to take formal and informal enforcement actions
(53 percent) and more intrusive and intense
examinations (49 percent).
New regulatory requirements have not
only increased costs, they have also limited the
ability of many institutions to generate revenues. Reflecting this new reality, 43 percent of
respondents said they were extremely or very
concerned over new restrictions or prohibitions
on profitable activities that will require a significant change in business model or legal structure.
Figure 19. Which of the following impacts on your organization have resulted from regulatory
reform in the major jurisdictions where it operates?
87%
Noticing an increased cost of compliance
65%
62%
Maintaining higher capital
54%
60%
Adjusting certain product lines and/or

business activities
48%
35%
Maintaining higher liquidity
No significant impacts
37%
7%
13%
2014
2012
52
Risk management information

systems and technology
T
HE global financial crisis underscored the

need for risk data that are accurate, timely,
consistent, and aggregated across the enterprise. Since then, risk data have been a priority
for regulators.
In 2013, the Basel Committee issued its
BCBS 239 paper, which emphasizes that banks
need systems capable of producing aggregated
risk data for all critical risks during times of
stress or crisis.124 Banks must also fully document and validate their aggregation capabilities
and reporting practices. G-SIBs must comply
by January 1, 2016, and BCBS 239 suggests that
supervisors apply the same rules to domestic
systemically important banks (D-SIBs).
CCARs stress tests require banks to
aggregate risk data across regions and lines of
business.125 There are also stricter requirements
for data quality and aggregation in various
capital and liquidity requirements, Solvency II,
the OCCs heightened standards, and MiFIR,

among other regulations.
Complying with these requirements is an
arduous task for some institutions. For example, many Eurozone banks encountered difficulties in providing the accurate, timely data
required by the ECBs asset quality review.126
When asked about the challenges facing their
institution, many respondents said that risk
information systems and technology infrastructure (62 percent) and risk data (46 percent) are
extremely or very challenging.
In response to these stricter requirements,
many financial institutions have undertaken
major data remediation and infrastructure programs. Progress has been made, but significant
work remains to be done at many institutions.
Less than half of the respondents rated their
institution as extremely or very effective in any
area of risk data and infrastructure, although
The three biggest challenges in risk management today

are 1) having the right data and technology in place to
help measure risk quickly and efficiently, 2) producing and
monitoring MIS reporting that can effectively help identify
risks on a timely basis, ideally with warnings before they
are a problem, and 3) managing the very high demand for
resources, which are increasingly hard to find and expensive
to pay for.
53
the ratings improved since 2012: data management/maintenance (39 percent compared to
20 percent in 2012), data process architecture/
workflow logic (35 percent compared to 23
percent) and data controls/checks (31 percent
roughly similar to 33 percent in 2012).
The pace of regulatory change places additional demands on risk technology systems.
Forty-eight percent of respondents said they

are extremely or very concerned about risk
technology adaptability to changing regulatory
requirements, an increase from 40 percent in
2012, while 46 percent of respondents said the
same about lack of integration among systems,
up from 31 percent in 2012 (figure 20).
Figure 20. How concerned is your organization about each of the following issues for
its risk management information technology systems?
Risk technology adaptability to changing
regulatory requirements
48%
Lack of integration among systems
46%
Lack of flexibility to extend the

current systems
35%
Inability to respond to time-sensitive and

ad-hoc requests
34%
Inability to integrate risk analytics from

multiple risk systems
31%
Risk data quality and management
28%
High cost of maintenance and vendor fees
28%
Lack of performance for more frequent and

timely reporting
27%
Lack of integrated risk and finance reporting

for economic capital optimization
25%
Out-of-date methodologies
25%
Inability to source required functionality from

a single vendor
21%
Constraints in aggregation and reporting of

risk analytics due to batch processing times
18%
Lack of product and asset class coverage
18%
Lack of aggregation of trading and

banking books
17%
Lack of cross-asset-class risk calculations
17%
Inability to capture increasing volumes
15%
Note: Figures represent the percentage of respondents that were extremely or very concerned about each issue.
54
Conclusion
The era of regulatory reform sparked by

the global financial crisis has become the new
normal. There has been an ongoing series of
new regulations affecting risk governance,
capital adequacy, liquidity, stress testing, and
prohibitions on proprietary trading, among
other areas. Institutions are being required to
enhance their capabilities for managing operational risk, with both regulators and management especially concerned about the impacts
of hacking and other types of cyber attacks.
Regulators are also focusing on the qualitative aspects of risk management. They are
looking beyond quantitative measures of market, credit, and liquidity risk to assess whether
institutions have created a culture that encourages employees to take appropriate risks and
that promotes ethical behavior more broadly.
In this effort, it is essential that incentive compensation schemes are aligned with an institutions risk appetite.
Success in all these areas depends on
quality risk data and effective information
systems. Yet, developing accurate, aggregated
risk data on a timely basis remains a challenge. Measurement can be especially difficult
for some risk types, such as operational risk,
and for qualitative issues, such as risk culture.
Deloittes Global risk management survey indicates there has been progress in many of these
areas. But with the regulatory expectations
being ratcheted up continually, institutions will
need to keep pace by regularly upgrading their
risk management capabilities:
Many institutions have implemented
strong risk governance at the level of their
board of directors and senior management,

including implementing an ERM program
and creating a CRO position. They will
now need to broaden their perspective to
consider how they can manage conduct risk
by embedding a risk culture throughout
their organization that encourages ethical
behavior by employees. Keys to this effort
will be the board of directors and senior
management communicating the value the
organization places on treating customers
fairly and also having incentive compensation practices that reward ethical behavior
and appropriate risk-taking.
As regulators rely more on stress tests
to assess capital adequacy and liquidity,
institutions will need to improve their stress
testing capabilities and attract personnel
55
with the required skills and experience. The

talent shortage noted in this survey will
make this an ongoing challenge.
More effective management of operational
risks, especially cybersecurity, will be
essential. Institutions will not only need
to improve their IT security processes, but
also their processes for selecting vendors
and assessing their security procedures.
Institutions will need to reassess their risk
data and information systems. Many institutions will need to improve their access to
high-quality and timely risk data as well as
their ability to quickly aggregate risk data
across lines of business and geographies.
56
Financial institutions are adjusting to

the new environment for risk management.
Most institutions will need to enhance their
risk management programs to stay current
improving analytical capabilities, investing in
risk data and information systems, attracting
risk management talent, fostering an ethical
culture, and aligning incentive compensation
practices with risk appetite. They will find
that business strategies and models must be
reassessed in response to changed regulations
more often than before. Perhaps most important, institutions will need to develop the flexibility to respond nimbly to the new normal
risk management environment of unceasing
regulatory change.
Endnotes
1. About the term leading practice: For
purposes of this paper, we consider industry
practices to fall into a range, from leading
to lagging. Some industry practices may
be considered leading practices, which are
generally looked upon favorably by regulators,
industry professionals, and observers due to
the potentially superior outcomes the practice
may attain. Other approaches may be considered prevailing practices, which are seen to be
widely in use. At the lower end of the range are
lagging practices, which generally represent
less advanced approaches and which may result
in less-than-optimal outcomes. Items reflected
as leading practices herein are based on survey
feedback and the editors and contributors
experience with relevant organizations.
2. Percentages total to more than 100
percent since respondents could
make multiple selections.
3. Neil Irwin, How a rising dollar is creating trouble for emerging economies,
New York Times, March 16, 2015, http://
www.nytimes.com/2015/03/17/upshot/
how-a-rising-dollar-is-creating-troublefor-emerging-economies.html?hp&action
=click&pgtype=Homepage&module=seco
nd-column-region&region=top-news&WT.
nav=top-news&_r=1&abt=0002&abg=1.
4. Bureau of Economic Analysis, National
income and product accounts: Gross domestic product: Fourth quarter and
annual 2014 (third estimate), March 27,
2015, https://www.bea.gov/newsreleases/
national/gdp/gdpnewsrelease.htm; GDP
projections in this section are from Global
Economic Prospects, The World Bank Group,
January 2015, http://www.worldbank.org/
en/publication/global-economic-prospects.
5. Tami Luhby, 2014 is best year for job gains
since 1999, CNN Money, December 5,
2014, http://money.cnn.com/2014/12/05/
news/economy/november-jobs-report/.
6. Neil Irwin, Job growth looks great;

wage growth, less so, New York Times,
January 9, 2015, http://www.nytimes.
com/2015/01/10/upshot/job-growthlooks-great-wage-growth-less-so.html.
7. Office for National Statistics, Statistical
Bulletin: Quarterly national accounts, quarter
4 (Oct to Dec) 2014, March 31, 2015, http://
www.ons.gov.uk/ons/dcp171778_398239.pdf.
8. eurostat, Flash estimate for fourth quarter
of 2014, February 13, 2015, http://ec.europa.
eu/eurostat/documents/2995521/6625198/213022015-AP-EN.pdf/6f7a18eb-0b2a-466b
-b444-4d240889a723.
9. Economist, Easing means squeezing,
January 31, 2015, http://www.economist.com/
news/finance-and-economics/21641271quantitative-easing-has-both-good-andbad-implications-europes-banks-easing.
10. Jonathan Soble, Japans economy expands,
but less than expected, New York Times,
February 15, 2015, http://www.nytimes.
com/2015/02/16/business/japans-economicgrowth-weaker-than-expected.html.
11. Mark Magnier, Lingling Wei, and Ian Talley, China economic growth is slowest in
decades, Wall Street Journal, January 19,
2015, http://www.wsj.com/articles/china-gdpgrowth-is-slowest-in-24-years-1421719453.
12. Board of Governors of the Federal Reserve
System, Comprehensive capital analysis
and review 2015: Summary instructions
and guidance, October 2014, http://
www.federalreserve.gov/newsevents/
press/bcreg/bcreg20141017a1.pdf.
13. Deloitte Center for Financial Services,
2015 Banking Outlook, 2015, http://www2.
deloitte.com/us/en/pages/regulatory/
banking-regulatory-outlook-2015.html.
14. Board of Governors of the Federal Reserve
System, Capital plan and stress test rules,
October 17, 2014, http://www.gpo.gov/fdsys/
pkg/FR-2014-10-27/pdf/2014-25170.pdf.
57
15. Deloitte EMEA Centre for Regulatory Strategy,

Top 10 for 2015: Our outlook for financial
markets regulation, 2015, http://www2.deloitte.com/global/en/pages/financial-services/
articles/regulatory-top-ten-for-2015.html.
23. The Economist Intelligence Unit, Banking stress tests will not turn the euro
zone around, December 15, 2014, http://
gfs.eiu.com/Article.aspx?articleType=
rf&articleid=72579791&secId=5.
16. Basel Committee on Banking Supervision,

Fundamental review of the trading book: A
revised market risk framework, October 2013,
http://www.bis.org/publ/bcbs265.pdf.
24. Thomas Atkins and Stefano Bernabei

After stress tests, tougher questions coming for Europes banks from ECB,
Reuters, December 1, 2014, http://
www.reuters.com/article/2014/12/01/
us-ecb-regulator-idUSKCN0JF25K20141201.
17. For a detailed discussion of structural

reform in banking in Europe, please see the
2014 report by Deloittes EMEA Centre for
Regulatory Strategy, Structural reform of
EU banking: Rearranging the pieces, http://
www2.deloitte.com/content/dam/Deloitte/uk/
Documents/financial-services/deloitte-uk-fsstructural-reform-eu-banking-april-14.pdf.
18. Matt Scuffham and Steve Slater, UK banks
urge regulator to speed up ringfencing
rules, Reuters, January 6, 2014, http://www.
reuters.com/article/2015/01/06/us-banksbritain-lloyds-idUSKBN0KF1M620150106.
19. European Commission, Proposal for a
regulation of the European parliament
and of the council on structural measures
improving the resilience of EU credit institutions, January 29, 2014, http://old.eur-lex.
europa.eu/LexUriServ/LexUriServ.do?
uri=COM:2014:0043:FIN:EN:PDF.
20. Gunnar Hkmark, Draft report on the proposal
for a regulation of the European parliament
and of the council on structural measures
improving the resilience of EU credit institutions,
Committee on Economic and Monetary Affairs,
European Parliament, December 22, 2014,
http://www.europarl.europa.eu/sides/getDoc.
do?pubRef=-%2f%2fEP%2f%2fNONSGML
%2bCOMPARL%2bPE-546.551%2b02%2b
DOC%2bPDF%2bV0%2f%2fEN; Financial
Services UK blog, EU bank structural
reformprogress, of sorts, Deloitte, January 9,
2015, http://blogs.deloitte.co.uk/financialservices/2015/01/eu-bank-structural-reform.html.
21. Stephanie Armour and Ryan Tracy, Big
banks to get higher capital requirement,
Wall Street Journal, April 8, 2014, http://
www.wsj.com/articles/SB100014240527
02303456104579489643124383708.
22. Michael Flaherty and Howard Schneider,
Fed considers using bank stress tests for
crisis prevention, Reuters, October 16, 2014,
http://www.reuters.com/article/2014/10/17/
us-usa-fed-banks-idUSKCN0I51VI20141017.
58
25. David Milliken and Huw Jones, Britain

warns of tougher bank stress tests ahead,
Reuters, December 16, 2014, http://uk.reuters.
com/article/2014/12/16/uk-britain-banksstress-idUKKBN0JU0IW20141216.
26. James Eyers, Banks have more to do to
prepare for crisis, warns APRA, Sydney Morning Herald, November 7, 2014, http://www.
smh.com.au/business/banking-and-finance/
banks-have-more-to-do-to-prepare-forcrisis-warns-apra-20141107-11ihw0.html.
27. Economist, Into the burning building,
January 10, 2015, http://www.economist.
com/news/britain/21638136-aviva-tryingexpand-troubled-market-burning-building.
28. Nathaniel Popper, Goldman Sachs
investments test the Volcker Rule, New
York Times, January 21, 2015, http://
dealbook.nytimes.com/2015/01/21/
goldman-investments-are-testing-volcker-rule/.
29. Deloitte, The final Volcker Rule: What does it
mean for banking institutions?, 2013, http://
www2.deloitte.com/global/en/pages/financialservices/articles/the-final-volckerrule.html.
30. Peter Eavis, Feds delay of parts of Volcker
Rule is another victory for banks, New York
Times, December 19, 2014, http://dealbook.
nytimes.com/2014/12/19/feds-delay-of-partsof-volcker-rule-is-another-victory-for-banks/.
31. A detailed discussion of the compliance issues
related to the Volcker Rule is provided in
Deloittes report, The Volcker Rule compliance
monitoring program, 2014, http://www2.
deloitte.com/content/dam/Deloitte/us/
Documents/risk/us-aers-volcker-rule.pdf.
32. European Commission, Proposal for a regulation of the European parliament and of the
council on structural measures improving
the resilience of EU credit institutions.
33. Mary Williams Walsh, Too big to fail
on financial regulators agenda again,
New York Times, January 21, 2015, http://
regulators-delve-into-too-big-to-fail-tag/.
34. Stephen J. Lubben, Do living wills

for banks even make sense?, New
York Times, August 11, 2014, http://
do-living-wills-for-banks-even-make-sense/.
markets regulation, 2015, http://www2.deloitte.
com/global/en/pages/financial-services/
36. Financial Services UK blog, Resolvability: Breaking down the barriers, Deloitte,
September 8, 2014, http://blogs.deloitte.
co.uk/financialservices/2014/09/resolvabilitybreaking-down-the-barriers.html.
37. Martin Arnold, Bank settlements hit $56bn
in most expensive year on record, Financial
Times, December 26, 2014, http://www.
ft.com/intl/cms/s/0/baa2d2c0-89c2-11e49dbf-00144feabdc0.html#axzz3PTZdZiPy;
Chiara Albanese, David Enrich, and Katie
Martin, Citigroup, J.P. Morgan take brunt of
currencies settlement, Wall Street Journal,
November 12, 2014, http://www.wsj.com/
articles/banks-reach-settlement-in-foreignexchange-rigging-probe-1415772504.
38. Bank for International Settlements, Proposals
to improve the operational risk capital framework release by the Basel Committee, October
6, 2014, http://www.bis.org/press/p141006.htm.
39. Bank for International Settlements, Revisions to the standardised approach for credit
risk: Basel Committee issues consultative
document, December 22, 2014, http://
www.bis.org/press/p141222a.htm.
40. John Heltman, Ready or not, here
comes Basel IV, Bloomberg, December
8, 2014, http://www.americanbanker.
com/news/law-regulation/ready-or-nothere-comes-basel-iv-1071503-1.html.
41. Davis Polk, Dodd-Frank progress report,
December 1, 2014, http://www.davispolk.com/
dodd-frank-progress-report-december-2014/.
42. Economist, It takes 28 to tango, February
21, 2015, http://www.economist.com/news/
finance-and-economics/21644199-new-planhelp-firms-find-funding-it-takes-28-tango.
43. James Kanter and Jenny Anderson, Europe
proposes a capital markets union, New York
Times, February 18, 2015, http://www.nytimes.
com/2015/02/19/business/international/europe-proposes-a-capital-markets-union.html.
44. Deloitte, Capital markets union: Positive

first steps, February 19, 2015, http://blogs.
deloitte.co.uk/financialservices/2015/02/
capital-markets-union.html.
46. Jonathan Weisman and Eric Lipton,
In new congress, Wall St. pushes to
undermine Dodd-Frank reform, New
York Times, January 13, 2015, http://
www.nytimes.com/2015/01/14/business/
economy/in-new-congress-wall-st-pushesto-undermine-dodd-frank-reform.html.
47. Victoria McGrane and Ryan Tracy, Small
banks score gains in lifting regulation, Wall
Street Journal, February 2, 2015, http://www.
wsj.com/article_email/small-banks-scoregains-in-lifting-regulation-1422904294-lMyQjAxMTE1MjAwMjIwNDIzWj.
48. Economist, Financial-transaction
taxes: Still kicking, January 31, 2015,
http://www.economist.com/news/
finance-and-economics/21641258new-life-bad-idea-still-kicking.
49. Nathaniel Popper and Peter Eavis, On Wall St.,
rules on capital humble banks and shrink pay,
New York Times, February 19, 2015, http://
www.nytimes.com/2015/02/20/business/dealbook/new-rules-transform-wall-st-banks.html.
50. Ibid.
51. Nicole Perlroth, JPMorgan and other
banks struck by hackers, New York Times,
August 27, 2014, http://www.nytimes.
com/2014/08/28/technology/hackerstarget-banks-including-jpmorgan.html.
52. James Titcomb, Could your bank be the
next victim of a cyber attack? Telegraph,
October 19, 2014, http://www.telegraph.
co.uk/finance/newsbysector/banksandfinance/11170888/Could-your-bank-bethe-next-victim-of-a-cyber-attack.html.
53. William Dudley, Ending too big to fail,
remarks at the Global Economic Policy Forum,
Federal Reserve Bank of New York, November 7, 2013, http://www.newyorkfed.org/
newsevents/speeches/2013/dud131107.html.
54. Financial Stability Board, Thematic review on
risk governance: Peer review report, February
12, 2013, http://www.financialstabilityboard.
org/wp-content/uploads/r_130212.pdf.
59
55. Financial Services UK blog, FCA business

plan: What firms can expect from the FCA in
20152016, Deloitte, March 25, 2015, http://
blogs.deloitte.co.uk/financialservices/2015/03/
fca-business-plan-2015-16.html.
56. Daniel K. Tarullo, member of the Federal
Reserve Board of Governors, Good compliance, not mere compliance, remarks at
Federal Reserve Bank of New York Conference on reforming culture and behavior in
the financial services industry, October
20, 2014, http://www.federalreserve.gov/
newsevents/speech/tarullo20141020a.htm.
57. Emily Glazer and Christina Rexrode, As
regulators focus on culture, Wall Street
struggles to define it, Wall Street Journal,
February 1, 2015, http://www.wsj.com/
articles/as-regulators-focus-on-culture-wallstreet-struggles-to-define-it-1422838659.
58. Victoria McGrane and Andrew Ackerman, US
regulators revive work on incentive-pay rules,
Wall Street Journal, February 16, 2015, http://
www.wsj.com/articles/u-s-regulators-revivework-on-incentive-pay-rules-1424132619.
59. Monetary Authority of Singapore, MAS
to give legislative effect to financial advisory industry review proposals, October
2, 2014, http://www.mas.gov.sg/Newsand-Publications/Media-Releases/2014/
MAS-to-give-Legislative-Effect-to-FinancialAdvisory-Industry-Review-Proposals.aspx.
60. Richard W. Holloway and Wen Yee Lee,
Recommendations of the financial advisory industry review panel in Singapore,
Milliman, January 25, 2013, http://www.
milliman.com/insight/Periodicals/asia-ealert/
Recommendations-of-the-Financial-AdvisoryIndustry-Review-Panel-in-Singapore/#.
61. Hong Kong Monetary Authority, Treat
customers fairly charter launching ceremony,
press release, October 28, 2013, http://www.
hkma.gov.hk/eng/key-information/
press-releases/2013/20131028-4.shtml.
62. Emily Glazer and Christina Rexrode, What
banks are doing to improve their culture,
Wall Street Journal, February 2, 2015, http://
blogs.wsj.com/moneybeat/2015/02/02/whatbanks-are-doing-to-improve-their-culture/.
63. Emily Glazer and Christina Rexrode,
As regulators focus on culture, Wall
Street struggles to define it.
64. Percentages total to more than 100 percent
since some institutions provide more than
one type of service. In the report, institutions that provide insurance services will
60
sometimes be be termed insurance companies (even if they also provide other types
of financial services) and institutions that
provide investment management services
will sometimes be be termed investment
management companies (even if they also
provide other types of financial services).
65. Deloitte, Forward look: Top regulatory
trends for 2015 in insurance, 2015, http://
www2.deloitte.com/us/en/pages/regulatory/
insurance-regulatory-outlook-2015.html.
66. In the 2012 survey, respondents were
asked how much time their board
of directors spends on risk management compared to five years ago.
67. Neil Roland, Banks excelling at riskgovernance but hindered by skill gaps, OCC
official says, FS Core, March 23, 2015.
68. Among the 28 survey respondents in the
United States and Canada, 82 percent (23
respondents) were from the United States.
69. For a discussion of the Federal Reserves EPS
for US banks, see Deloittes report, Final look: A
practical guide to the Federal Reserves enhanced
prudential standards for domestic banks,
2014, http://www2.deloitte.com/content/
dam/Deloitte/us/Documents/audit/us-aersdeloitte-eps-domestic-final-02-12042014.pdf.
70. For a discussion of the Federal Reserves EPS
for foreign banking organizations, see Deloittes
report, Final look: A practical guide to the
Federal Reserves enhanced prudential standards
for foreign banks, 2014, http://www2.deloitte.
com/content/dam/Deloitte/us/Documents/
audit/us-aers-eps-foreign-02-12042014.pdf.
71. Official Journal of the European Union,
Directive 2013/36/EU of the European Parliament and of the Council,
Article 76, June 26, 2013, http://eur-lex.
europa.eu/LexUriServ/LexUriServ.do?u
ri=OJ:L:2013:176:0338:0436:EN:PDF.
72. Deloitte Center for Financial Services, Bank
board risk governance, Deloitte University
Press, 2015, http://d2mtr37y39tpbu.cloudfront.
net/wp-content/uploads/2015/02/DUP_1072_
Bank-Board-Risk-Governance_MASTER1.pdf.
73. The phrase CRO or equivalent
position is shorted to CRO in
the remainder of the report.
74. Percentages total to more than 100
percent since respondents could make
multiple selections. These percentages are
based on respondents at institutions that
have a CRO or equivalent position.
75. For a discussion of the evolution of the risk

appetite concept and its practical application, see Deloittes Establishing risk appetite
statements for stronger risk management,
December 22, 2014, http://deloitte.wsj.com/
riskandcompliance/2014/12/22/establishingrisk-appetite-statements-for-strongerrisk-management/ and Risk appetite in the
financial services industry: A requisite for risk
management today, 2014, http://www2.deloitte.
com/content/dam/Deloitte/ie/Documents/
FinancialServices/investmentmanagement/
us_aers_grrs_riskappetite_03102014.pdf.
76. The Senior Supervisors Group (SSG) is
composed of the staff of supervisory agencies
from ten countries and the European Union:
the Canadian Office of the Superintendent
of Financial Institutions, the European
Central Bank Banking Supervision, the French
Prudential Control and Resolution Authority,
the German Federal Financial Supervisory
Authority, the Bank of Italy, the Japanese Financial Services Agency, the Netherlands Bank,
the Bank of Spain, the Swiss Financial Market
Supervisory Authority, the United Kingdoms
Prudential Regulatory Authority, and, in the
United States, the Office of the Comptroller
of the Currency, the Securities and Exchange
Commission, and the Federal Reserve.
77. Senior Supervisors Group, Risk management lessons from the banking crisis of
2008, October 21, 2009, https://www.sec.
gov/news/press/2009/report102109.pdf.
78. Senior Supervisors Group, Observations on
developments in risk appetite frameworks
and IT infrastructure, December 23, 2010,
http://www.newyorkfed.org/newsevents/
news/banking/2010/an101223.pdf.
79. Financial Stability Board, Principles for an
effective risk appetite framework, November
2013, http://www.financialstabilityboard.
org/wp-content/uploads/r_131118.pdf.
80. The survey results in this section are based
on respondents at institutions that use the
three lines of defense risk governance model.
81. Neil Roland, Banks excelling at riskgovernance but hindered by skill gaps, OCC
official says, FS Core, March 23, 2015.
82. Joe Rennison, Stress, tested, Risk
Magazine, August 2014.
83. The survey results in this section are based on
respondents at institutions using stress testing.
84. Shearman & Sterling LLP, TLAC: An additional capital requirement for G-SIBs,
December 8, 2014, http://www.shearman.
com/~/media/Files/NewsInsights/Publications/2014/12/TLAC-An-Additional-CapitalRequirement-for-G-SIBs-FIA-120814.pdf.
85. Jack Ewing, Basel banking chief expects
fine-tuning of risk rules, New York Times,
December 5, 2014, http://dealbook.nytimes.
com/2014/12/05/basel-banking-chief-expectsfine-tuning-of-risk-rules/; Reuters, Basel
watchdog wants standardized assessment of
banks capital, December 22, 2014, http://
www.reuters.com/article/2014/12/22/us-banksregulations-idUSKBN0K017O20141222.
86. Huw Jones, Basel watchdog flags
shake-up of bank capital calculations,
Reuters, November 12, 2014, http://
www.reuters.com/article/2014/11/12/
basel-banks-idUSL6N0T23FL20141112.
87. Victoria McGrane and Ryan Tracy, Fed to
hit biggest US banks with tougher capital
surcharge, Wall Street Journal, September
9, 2014, http://www.wsj.com/articles/
feds-tarullo-says-fed-board-will-unveilsystemically-important-financial-institutionsurcharge-rule-soon-1410211114.
88. Swiss Finance Institute, The extra cost of Swiss
banking regulation, February 2014, http://
www.swissfinanceinstitute.ch/the_extra_cost_
cost_of__swiss_banking_regulation.pdf.
89. Bloomberg Brief, Financial regulation: Asia-Pacific region special, July
31, 2014, http://www.bloombergbriefs.
com/content/uploads/sites/2/2014/08/
PRINT-FinReg_Asia-Pacific.pdf.
90. Among the survey participants, 48 percent
are subject to Basel II/III regulatory capital
requirements, while an additional 7 percent
are not subject to these requirements but have
voluntarily adopted them. The survey results in
this section on Basel II/III are based on respondents at institutions that are subject to Basel
II/III requirements or have adopted them.
91. Bank for International Settlements, Basel
III: The liquidity coverage ratio and liquidity
risk monitoring tools, January 2013, http://
www.bis.org/publ/bcbs238.htm; Bank for
International Settlements, Annex 1: Summary
description of the LCR, January 6, 2013,
http://www.bis.org/press/p130106a.pdf.
92. Bank for International Settlements, Basel III:
The net stable funding ratio, October 2014,
http://www.bis.org/bcbs/publ/d295.htm.
93. Ibid.
94. The full form of the US Liquidity Coverage
Rule will apply to all Basel III advanced
approach banks (that is, depository institution
61
holding companies with $250 billion or more

in total assets or $10 billion or more in foreign
exposure and any consolidated depositary
institutions with assets of $10 billion or more).
95. Emily Stephenson and Douwe Miedema, U.S. regulators adopt tighter rules
for banks cash needs, Reuters, September
3, 2014, http://www.reuters.com/article/2014/09/03/us-financial-regulationsliquidity-idUSKBN0G1P620140903.
96. Ibid.
97. Deloitte, Forward look: Top regulatory
trends for 2015 in banking, 2015.
98. Seb Cohen and Francesco Nagari, Rethinking
the response: A strategic approach to regulatory
uncertainty in European insurance, Deloitte
LLP, 2013, https://www2.deloitte.com/content/
dam/Deloitte/uk/Documents/financial-services/deloitte-uk-rethinking-the-response.pdf.
99. Bloomberg Brief, Financial regulation: Asia-Pacific region special, July
31, 2014, http://www.bloombergbriefs.
com/content/uploads/sites/2/2014/08/
PRINT-FinReg_Asia-Pacific.pdf.
100. Daniel K.Tarullo, Advancing macroprudential
policy objectives, speech at the Office of
Financial Research and Financial Stability
Oversight Councils 4th Annual Conference
on Evaluating macroprudential tools:
Complementarities and conflicts, January
30, 2015, http://www.federalreserve.gov/
newsevents/speech/tarullo20150130a.htm.
101. May Jo White, Chairmans address at
SEC Speaks 2014, February 21, 2014,
http://www.sec.gov/News/Speech/Detail/
Speech/1370540822127#.VPsR_-Eeo4s.
102. Securities and Exchange Commission,
SEC adopts money market fund reform
rules,July 23, 2014, http://www.sec.
gov/News/PressRelease/Detail/PressRelease/1370542347679#.VPtmheEeo4s.
103. Nicholas Elliott, AIFMD complicates pursuit
of capital, Wall Street Journal, July 23,
2014, http://blogs.wsj.com/riskandcompliance/2014/07/23/the-morning-risk-reportaifmd-complicates-pursuit-of-capital/.
104. Financial Industry Regulatory Authority,
2015 regulatory and examination priorities
letter, January 6, 2015, https://www.finra.
org/web/groups/industry/@ip/@reg/@guide/
documents/industry/p602239.pdf.
105. Ibid.
62
106. Office of the Comptroller of the Currency,

Asset Management Comptrollers Handbook:
Conflicts of interest, January 2015, http://www.
occ.gov/publications/publications-by-type/
comptrollers-handbook/conflictofinterest.pdf.
107. European Securities and Markets Authority, Final Report: ESMAs technical advice
to the commission on MiFID II and MiFIR,
December 19, 2014, http://www.esma.
europa.eu/system/files/2014-1569_final_report_-_esmas_technical_advice_to_the_commission_on_mifid_ii_and_mifir.pdf.
108. Deloitte, MiFID II: Product governance
and unbundling dealing commission,
January 16, 2015, http://blogs.deloitte.co.uk/
financialservices/2015/01/mifid-ii.html.
109. Financial Services Authority, Conflicts of
interest between asset managers and their
customers, November 2012, http://www.fsa.gov.
uk/static/pubs/other/conflicts-of-interest.pdf.
110. DavisPolk, FinCENs proposed rule to
enhance customer due diligence requirements for financial institutions, September
30, 2014, http://www.davispolk.com/
fincen%E2%80%99s-proposed-rule-enhancecustomer-due-diligence-requirements-financial-institutions-%E2%80%93-comments/.
SEC charges AXS Rosenberg Entities for
concealing error in quantitative investment
model, February 3, 2011, http://www.sec.
gov/news/press/2011/2011-37.htm.
112. Ponemon Institute LLC, 2013 cost of data
breach study: Global analysis, benchmark
research sponsored by Symantec and independently conducted by Ponemon Institute
LLC, May 2013. Analysis performed on 277
companies globally in 16 industry sectors after
those companies experienced the loss or theft
of protected personal data, https://www4.
symantec.com/mktginfo/whitepaper/053013_
GL_NA_WP_Ponemon-2013-Cost-of-aData-Breach-Report_daiNA_cta72382.pdf.
113. Federal Reserve, Guidance on managing
outsourcing risk, Division of Banking
Supervisions and Regulation, Division of
Consumer and Community Affairs, and
Board of Governors of the Federal Reserve
System, December 5, 2013, http://www.
federalreserve.gov/bankinforeg/srletters/
sr1319a1.pdf; Office of the Comptroller of the
Currency, OCC Bulletin 2013-29, October 30,
2013, http://www.occ.gov/news-issuances/
bulletins/2013/bulletin-2013-29.html.

Final rule: Compliance programs of
investment companies and investment
advisers, February 5, 2004, http://www.sec.
gov/rules/final/ia-2204.htm#P54_5275.
120. Daniel Huang, Emily Glazer, and Danny Yadron, Financial firms bolster cybersecurity budgets, Wall Street Journal, November 17, 2014,
http://www.wsj.com/articles/financial-firmsbolster-cybersecurity-budgets-1416182536.
115. Office of Compliance Inspections and

Examinations, OCIE Cybersecurity Initiative, Securities and Exchange Commission,
April 15, 2014, http://www.sec.gov/ocie/
announcement/Cybersecurity+Risk+Ale
rt++%2526+Appendix+-+4.15.14.pdf.
121. Office of Compliance Inspections and

Examinations, Cybersecurity examination
sweep summary, Securities and Exchange
Commission, February 3, 2015, http://www.
sec.gov/about/offices/ocie/cybersecurityexamination-sweep-summary.pdf.

122. The National Law Review, SEC and

FINRA issue results of cybersecurity
examinations, February 18, 2015, http://
www.natlawreview.com/article/sec-and-finraissue-results-cybersecurity-examinations.
117. Committee of Sponsoring Organizations

of the Treadway Commission, Internal
ControlIntegrated Framework, May
2013, http://www.coso.org/ic.htm.

118. Vikram Bhat and Lincy Francis Therattil,

Transforming cybersecurity: New approaches
for an evolving threat landscape, Deloitte
LLP, 2014, http://www2.deloitte.com/
us/en/pages/financial-services/articles/
dcfs-transforming-cybersecurity.html.
119. Mandiant, Not your average cybercriminal:
A look at the diverse threats to the financial
services industry, September 23, 2013,
as cited in Deloittes infographic Transforming cybersecurity: New approaches
for an evolving threat landscape.
124. Deloitte, From principles to practicalities:

Addressing Basel risk data aggregation and
reporting requirements, 2013, http://
www2.deloitte.com/us/en/pages/
regulatory/basel-risk-data-aggregation-andreporting-requirements.html?nc=1.
125. Rennison, Stress, tested.
63
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Global risk management

survey, ninth edition

Global risk management survey, ninth edition

About the editor

About Deloittes financial services industry practice

Operating in the new normal: Increased regulation and heightened expectations

Asset liability management|49

Regulatory risk |51

Risk management information systems and technology|53

Global risk management survey, ninth edition

practice. In the area of capital adequacy, almost

Operating in the new normal: Increased regulation and heightened expectations

is introducing higher standards for capital

Financial institutions must not only comply

Global risk management survey, ninth edition

HE global financial crisis was the catalyst

Operating in the new normal: Increased regulation and heightened expectations

board of directors or board risk committees. Yet

focus on the steps that institutions can take to

Global risk management survey, ninth edition

Introduction: Economic and

ELOITTES Global risk management

Economic storm clouds

The US GDP grew 2.4 percent in 2014, and

Operating in the new normal: Increased regulation and heightened expectations

Continuing regulatory reform

In 2014, the US Federal Reserve announced

The focus of regulators

Global risk management survey, ninth edition

credit risk would replace existing standardized

retain substantial discretion on the application

Higher capital requirements

Operating in the new normal: Increased regulation and heightened expectations

great promise as a capital tool, a risk-sensitive

or not. The five major US banking regulatory

Global risk management survey, ninth edition

European regulators have also proposed

structures remained too complex to recover or

Record level of fines

Regulatory fines levied

Operating in the new normal: Increased regulation and heightened expectations

institutions, in an effort to address the problem

More regulatory changes

In February 2015, the EC published its first

Global risk management survey, ninth edition

transactions.48 At the same time, institutions

Operating in the new normal: Increased regulation and heightened expectations

reporting disclosures expected in 2015, prior

Conduct risk and risk culture

also to create and embed risk culture. In 2013,

Global risk management survey, ninth edition

paper on legislative amendments for comment

Banks are responding to the regulatory

ABOUT THE SURVEY

Figure 2. Participants by financial

Figure 3. Participants by asset size

Note: Percentages total more than 100% since

Graphic: Deloitte University Press | DUPress.com

Analysis by asset size

Operating in the new normal: Increased regulation and heightened expectations

HE central role of the board of directors in providing oversight of a financial

With regard to changes

banks, Theres clear evidence across all large