An unwillingness by Australia's major banks to overhaul faulty risk management frameworks may see them suffer higher loss levels in 2009, according to global consulting firm KPMG.
While banks are becoming far more risk averse in their lending practices, a reluctance by the big four lenders to fix risk management systems relaxed over the past five years may see more losses on the horizon, KPMG's banking sector head Andrew Dickinson said.
"The losses they will experience over the next 12 months will arise from exposures they got themselves into six to 18 months ago, so I'm sure we'll see some more losses coming through because of that," he told AAP.
A relaxation in risk management standards during the bull market was partly to blame, although Australian banks remained more conservative than their UK and US counterparts.
"It's very difficult when things are looking so rosy and no-one can see any hand grenades on the horizon to keep saying we should be worried about these things."
His comments came as a KPMG global survey of 400 banking executives revealed 58 per cent of executives who plan to review their risk management frameworks have yet to plan or start their reviews.
This is despite little doubt that a lack of discipline within risk management was a significant factor behind the credit crisis.
And in Australia it was a case of all talk and no action, Mr Dickinson said.
"All banks are looking at it, but what I'm not seeing at this stage is real decisive action to really do a major overhaul of their risk management frameworks."
"Everyone seems to agree the risk management frameworks have been inadequate but I have to say in many cases a lot of institutions seem to be saying well it's everyone else's problem."
Chief among risk management areas to be addressed is more investment in stress testing and scenario analysis of potential events such as a blow-out in the unemployment level or sudden drop in property values.
"I think all the banks now recognise there is a need to not rely on Variance-at-Risk (VAR) models and other sorts of risk models which really just project historical patterns and assume that things aren't going to change in the future," Mr Dickinson said.
"When you're looking at those historical loss norms you also need to consider scenarios which may eventuate in the future such as a massive shock to unemployment or very significant decreases in property values to see what loss behaviours that could drive in the future."
While the cultural implications associated with a complete overhaul of any bank's risk management framework mean it may take two to three years to become effective, the fundamental building blocks of an improved scheme could be in place within six to 12 months.
And the buck must stop at board level, Mr Dickinson said.
"I don't think you can ever delegate the requirement for a robust risk governance approach.
"The board always has to be reinforcing the importance of risk and that has to cascade down through all levels of management to everyone at the front line."
