A solid 72% majority of global banking executives cite regulatory uncertainty as the top challenge their organizations face around risk management, according to survey released Tuesday by Ernst & Young.

As global regulators and legislators tighten regulatory oversight in response to the financial crisis, banks are bracing for the new rules to affect fundamental aspects of their business. Ernst & Young’s 2010 survey on risk governance reveals that 80% of banking executives polled plan a significant increase in costs to manage heightened regulatory requirements and strengthen risk governance across their business.

“As banks get back to business, recovering and adapting to the new market environment requires navigating the triple threat of new regulatory requirements, rethinking risk strategies and grappling with rising costs,” says Diane Sinhuber, leader of Ernst & Young’s financial services practice. “Right now, caution seems to be the sentiment among executives, who remain concerned about the recession’s depth and pace of recovery. This makes planning and decision-making — both short- and long-term — extremely difficult.”

Global chief financial officers, chief risk officers and compliance officers agree that risk management costs will continue to escalate over the next 18 months and beyond, as they boost the time and systems dedicated to dealing with the new regulatory frontier. Some even predict “exponential” increases as the requirements tighten.

New regulations designed at the G20, International Monetary Fund and European level and nationally set by local regulators are expected to impose further restrictions on capital, liquidity, risk management and compensation practices. However, for countries like Canada, it remains to be seen just how strict they will be and how soon they will take effect.

Executives are already busy responding to pending regulatory requirements, particularly the potential restrictions on capital. They report a variety of initiatives — raising capital levels and ratios, rebalancing portfolios and reassessing market strategies — to prepare for the anticipated changes.

“If the financial crisis is to have a silver lining for banks, it’s likely many executives believe the industry’s heightened focus on risk governance is one of the most positive outcomes,” says Sinhuber. “Slowly we’re seeing organizations mobilize to identify and address deficiencies. The challenge, however, is that these efforts to stabilize and strengthen the industry, come at a cost.”

Respondents unanimously agree that risk governance must remain a top priority on senior management agendas: 38% of interviewees say their organizations are working diligently to upgrade their risk governance policies and procedures with the goal of instilling a risk awareness culture throughout the organization.

IE