Driving performance through enhanced risk oversight
Boards of directors at large banks may have built a strong risk oversight foundation, but many still have work to do in adopting leading practices.
In recent quarters, two groups of large US banks showed substantially different operating results. The average return on average assets (ROAA) in one group was 57 percent higher. Otherwise—in terms of average total assets and other characteristics—the two groups were roughly similar.
One key difference between the two groups was that the board risk committee charters of the higher-performing banks documented the need for a risk expert.
Of course, correlation doesn’t mean causation, and because it is only in recent times that the more rigorous risk governance practices have been introduced, it will be a while before one can examine the long-term relationship between robust risk governance and financial performance. Requiring a risk expert on the board risk committee is just a strong sign of a bank’s commitment to risk management and governance, which, in theory, can exert a positive influence on performance.