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02:07 PM

Accepting The Risk

Banks need to better understand their risks to satisfy new rules

Jim Rohr loves one kind of risk--taking the chance that if he lends you money, you'll pay him more back. But there are other kinds of risk that the CEO of PNC Financial Services Group Inc. would just as soon do without, like the possibility of someone writing fake checks or an ATM network going down or a flood in a data center.

So a year ago, Rohr appointed Tom Whitford as chief risk officer. His office has four managers dedicated to specific risk areas. Each works within PNC lines of business to implement risk-management programs, and Rohr keeps a close watch. "It all rolls into one person in our organization, the CRO, and he reports directly to me," he says.

PNC's IT department is among those most closely scrutinized as part of this system of checks and balances that the risk-management group provides. CIO Tim Shack and his team are expected to take risk into account when deploying technology, and the risk-management team constantly evaluates how well they're doing. "When the CIO comes to me and tells me he has the telecom backup site all set up, I have a risk person who then goes out and evaluates it," Rohr says.

The banking industry has been focusing more attention than ever on risk management. At the same time, banking regulators from around the world are working out a complicated set of rules for governing global banks, called the Basel II Accord, part of which looks at how much money banks must set aside for emergencies. What banks and regulators are doing hasn't been widely attempted, and it has dramatic implications for business technology: to regularly measure the risks a company faces and put price tags on them. While the largest banks are leading the effort because they'll be the first regulated, their success will be monitored by smaller banks--and likely other industries. By closely measuring risks, executives may look differently at the cost of technology-intensive investments to avoid those risks. "Supervisors expect the advanced measurement approach to provide the incentives to invest in new systems and practices that will reduce the potential for serious losses from operational risk," Federal Reserve vice chairman Roger Ferguson said in a February speech.

Basel II takes into account that globalization, consolidation, and real-time information have changed the risks in the financial-services industry. From a business-technology standpoint, the industry is more dependent than ever on electronic transactions and more responsive to real-time information. At the same time, industry consolidation has left fewer banks in control of more money. These banks' "operations are increasingly complex and sophisticated," Ferguson said. "At the same time, significant weaknesses in one of these entities, let alone failure, has the potential for severely adverse macroeconomic consequences." In other words, if one bank takes a bad gamble and loses, the entire industry and global economy could suffer.

Business technology plays a dual role in this risk picture. IT innovations make it easier to calculate the risks and mitigate the dangers of doing business, but each technology deployment also brings new risk of outages or mistakes. Simply doing business over a Web site opens a range of potential problems, from security issues to lost customers if the site is down. "The Internet opens a whole new area of risk for us," PNC's Rohr says.

Technology spending for risk management will account for 9% of the average IT budget in financial services, according to a report from IT advisory firm Gartner released last month. The report predicts that building risk-management infrastructures will remain an IT invest- ment priority through 2005. Still, getting firm return-on-investment measures or benchmarks for spending is tough. "Regulators and analyst firms have been working hard to put the pieces together to justify operational-risk-mitigation investment, and it sounds good, but it's hard to prove that any one bank is taking the right steps for operating risk," says Susan Cournoyer, principal analyst at Gartner.

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