Surveys say: banks on cost of collateral; short-termism in risk management

Two new surveys have come out, one from SIX Securities Services on banks and the cost of capital, the other from SunGard and PRMIA on short-term thinking in risk management.

The SIX survey, released apparently as a press release only, showed the following results:

Over a third (35%) of financial institutions believe that it is acceptable for collateral to be low quality, complex and opaque, so long as it is cheap.

– 43% believe that collateral should be simple, high quality, liquid and easy to value
– 57% think that price of collateral is more important than quality
– 53% of financial institutions estimate that high grade collateral will increase in cost by about 9% before 2015
– 48% of respondents agree that securitising and repackaging existing portfolios to create new collateral pools will result in additional risk and sow seeds for the next crisis

We read the SIX press release here. Bloomberg also wrote it up here.

SunGard and the Professional Risk Managers’ International Association (PRMIA) put out an interesting survey this morning looking at short-term thinking in risk management. Among the major findings:

C level and management concerns towards risk and regulations appear to be reactive and short-term: Nearly 30% of respondents are concerned with current regulatory and economic uncertainty compared to concerns relating to having the right in-house, risk management expertise and cultural challenges in aligning the front line with risk-taking goals, which are among the lowest at approximately 7%.

Changing priorities suggest reactive risk management planning: Only two of ten risk priorities maintained the same ranking among global institutions in 2013 compared to 2012 (liquidity risk management and risk appetite framework). Capital planning is ranked by these firms as the second from last priority, having been one of the top three last year. The priorities of US firms changed most in the area of capital adequacy assessment**, with economic capital falling from the top priority last year to number eight. The top four 2013 global risk priorities are liquidity risk management, regulatory capital adequacy, credit portfolio optimization and risk appetite.

Smaller banks lag larger counterparts in risk management progress: 15% of US firms with <$10Bn in assets have no plans to develop a stress-testing process compared to all institutions with $10Bn-$50Bn in assets, which have either completed a stress test already or expect to develop one in the next 12 months. All banking institutions in the US with >$50Bn in assets have completed an enterprise-wide stress test.

A link to the SunGard/PRMIA report press release is here, with the full report available on request.

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