Banks in UAE should focus on risk management

Dubai: Banks in the UAE and Gulf Co-operation Council (GCC) should remain vigilant and focus on risk management as a key component of their strategy to shield themselves amid turbulent financial markets, an expert said.

"It's really a time, especially for the top management of the banks, to look very closely at risk management. It's a tough time for banks," said financial risk management partner at KPMG in the UAE, Joanna Declercq Zelechowska.

She said top financial institutions in the US and Western Europe were hit by the turmoil, an indication of the severity of the crisis, the root of which is linked to a shift in the way banking worked.

Relationships

"Banking was based very much on relationships. There was relationship banking, where you knew your customer and very often you were a more local bank. You really knew your risks. And then there was a very big shift to transactional banking which, when you look at the securitisation, when you look at the structured products, complex derivatives where you basically pass the risk and where at one point you really lose the understanding of who is the counterparty and where this risk is passed," she said.

"At some point in time, you almost don't know who the last counterparty in the chain is; who is at the end carrying all the risk. So this is really the root of the problem."

While banks in the region and the UAE have not been as hard-hit as their Western counterparts, Zelechowska said it remained imperative for them to propagate a "risk culture" in financial institutions.

Banks needed to look at their "lines of defence", including the people interacting directly with customers, the middle office and the back office. It was also important to bring the issue of risk management up to board level in the chain of command of an institution.

"From what I have seen at this moment is this definitely could be improved [in the region]. On the risk management side many banks are struggling with skilled resources.

"To hire someone, even in Western Europe, who has extensive risk management experience is very difficult and it's even more difficult here," she said.

A central aim of any reassessment of risk management should be to simplify the system to ensure that the three elements of an effective risk management regime are in place. This includes governance, reporting and data and processes and systems.

At some point in time, you almost don't know who thelast counterparty in the chain is; who is at the end carrying all the risk. So this is really the root ofthe problem."