2001

New PA survey indicates link between the effective use of risk measurement tools and significantly higher shareholder returns - 07 September 2001

A new global survey - the first of its kind - from PA Consulting Group benchmarks what banks around the world are doing to manage risk, an area of intense focus as banks prepare for the new Basel Capital Accord, which is scheduled to go ‘live’ in 2005. The results of the survey, to be published in early September, are strongly compelling: they demonstrate clearly that in order to significantly increase their total shareholder returns (TSR), banks should focus on expanding their use of risk management tools, rather than on developing more sophisticated tools.

As the countdown to Basel progresses, banks are coming under increased scrutiny regarding disclosure of their underlying risks. PA’s report shows that the banks are investing heavily in risk measurement techniques, but differing widely both in their approaches to this investment and also in terms of how much real performance benefit they have gained from their risk management investments.

In risk management terms, the analysis identified four categories of banks, which were then correlated with their average total shareholder returns:

• ‘Ostriches’ - have not developed sophisticated risk tools, and are not using even the basic tools to make business decisions; they see relatively low returns
  
• ‘Academics’ - have developed sophisticated tools, but are not using these to run the business; unsurprisingly, they have exactly the same average performance as the ‘Ostriches’
  
• ‘Shoestringers’ - have only basic risk tools, but are using these actively and effectively to make business decisions; they produce on average 20% greater returns over three years than the ‘Ostriches’ and ‘Academics’ - a significantly better performance
  
• ‘Leaders’ - use their sophisticated tools to maximum effect; but they see only slightly better returns than the ‘Shoestringers’ from their more sophisticated tools- an additional 4% over three years.
  

The research, led by Eddie Niestat and James Ward, risk management experts in PA’s Financial Services Practice, provides a clear lesson for banks: using basic risk management tools, specifically to make better business decisions, results in improved shareholder returns; much more so, for almost all banks, than increasing the sophistication of those tools ever will.

Eddie Niestat comments:

“While most banks already have the basic risk management tools in place, most are failing to reap their full benefits. Credit, market, and operational risk tools are not being applied to maximum effect in front-line risk management functions such as deal pricing and deal structuring. Also, most banks are not using these tools to report on risk-adjusted profitability and using this as a main performance measure, and even fewer banks are linking these measures into staff compensation, which numerous studies have shown to be the by far the most effective way of driving shareholder value creation.”

The report also indicates that the active use of each type of risk tool has a positive impact on TSR, and the lower the level in the organization at which risk-adjusted profitability is calculated, the greater the impact on TSR. Implementing risk-based management is not without its obstacles; gaining senior management buy-in is essential, as is obtaining the required quantity and quality of data.

Eddie Niestat concludes:

“Having the right tools for the job has always been important, but never more so than in this age of complexity.”

These findings are explained fully in PA’s survey report, which also examines the practical issues involved in implementing risk-based management.

For a copy of the report or to arrange an interview with Eddie Niestat or James Ward, please call Linda Pearse on +44 1763 267137.

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For more information, please contact:

Linda Pearse PA Consulting Group Cambridge Technology Centre Melbourn Royston SG8 6DP Tel: +44 1763 267137 Fax: +44 20 7333 5050 E-mail: linda.pearse@paconsulting.com

Notes to editors

PA Consulting Group is a leading management, systems and technology consulting firm, with a unique combination of these capabilities. Established almost 60 years ago, and operating worldwide from over 40 offices in more than 20 countries, PA draws on the knowledge and experience of around 4,000 people, whose skills span the initial generation of ideas and insights all the way through to detailed implementation.

PA builds strategies for the creation and capture of shareholder and customer value, and helps clients accelerate business growth through innovation and the application of technology. PA works with clients to improve performance, mobilize human resources and deliver change effectively, including managing major projects, and designing and implementing enterprise-wide systems and full e-business solutions.

PA focuses on creating benefits for clients rather than merely proposing them, and this focus is supported by an outstanding implementation track record in every major industry and for governments around the world. PA also develops leading-edge technology both for its clients and within its own portfolio of venture companies in areas ranging from software to wireless technology to life sciences.

PA distinguishes itself from its competitors through the range and quality of its people, the depth of its industry insight, its development and use of technology, and also its independence and culture of respect, collaboration and flexibility in working with clients.

We are proud that our clients say 'PA makes it happen'.

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