With many consumers still concerned with the health and prudence of banks following the financial crisis and subsequent government bailout, banks industry-wide are exploring how to repair their tarnished reputations and ensure sound practices in the future. Banks are revamping the structure of their risk management departments to give them a greater role in front-line business. The biggest challenge banks face, however, may be changing the banking culture. Risk management has historically been viewed as another annoying stop on a long road of bureaucracy that has hindered management from making quick decisions in a profit-driven industry.  

One important component of reform is developing counterparty risk management. According to a survey by Ernst & Young, 90 percent of banks have altered their counterparty risk management procedures since September 2008.  They are improving aggregation and centralization of information as well as decision-making. They are also using market knowledge of credit default swap prices to measure counterparty risk.

Counterparty risk is a major concern for European banks reluctant to lend to each other, especially Greece, due to sovereign debt exposure. The overnight lending rate has hit record highs. Circumstances are eerily similar to conditions prior to the 2008 collapse of Lehman Brothers. On Friday, the results of the stress tests performed on 91 EU banks will give a clearer assessment of the health of the European banking industry. No matter what the highly anticipated tests reveal, banks in Europe as well as the U.S. must learn from both the current European situation and 2008 fallout in the U.S. to refine counter party risk management processes and improve industry stability. 

Sincerely,
Lisa Valentine
Managing Editor, FSOkx