CFO Blog: Commentary and Opinion

It's good to see the BIS turning proactive. That's because banks' risk-management functions are still not sturdy enough to avert another crisis.

Before the holidays, Ernst & Young, in conjunction with the Institute of International Finance (IIF), a lobbying group, surveyed banks worldwide on the progress they have made in improving risk management and governance. The answers are not good news for companies worried about counterparty risk in their banking relationships.

Gaps in the risk-control framework of financial institutions remain very wide, according to bankers; the risk function still doesn't have much of a say on major strategic decisions and new products, for example. What's more, boards of directors are still insufficiently versed in banks' risks to be able to challenge how top management handles those risks. (So the goal of improving governance from the top by having the board establish a clear risk appetite is still a work in progress.)

And to no one's surprise, banks are still having a hard time producing a daily view of counterparty exposures across product lines. Obtaining such views takes a few days, even in a crisis situation, according to one banker.

Finance chiefs were noted only once in the survey: U.S. bankers said there was a marked increase in the involvement of the CFO in assisting with fair valuation of structured products. While that's progress, it may also suggest that CFOs still lack a broader say in market and credit risk management.

What we wrote almost two years ago remains true: it could take years for banks to view risk through a companywide lens and establish an environment in which the CFO and risk officer communicate regularly. In the meantime, it behooves nonfinancial CFOs -- and regulators -- to continue to cast a cold eye on financial-services firms' risk exposures.