The importance of considering risk in top-level management decisions –An empirical study of Swedish universal banks

Abstract

Background and Problem: The occurrence of the latest financial crisis has revealed deficiencies within risk management in banks. There is a need for improvements in external as well as internal control in order to reinforce risk management in banking and thus prevent the emergence of another financial crisis. The Basel Accord represents the external control, which has great impact on banks’ risk management worldwide. A major lesson learned from the financial crisis is the importance of integrating risk management into top-level management decisions, however, problems may arise due to risk managers and decision makers having different point of reference. Aim of Study: The aim of this thesis is mainly to investigate how risk awareness manifests itself in top-level management in the Swedish universal banks and if the risk awareness has increased in Swedish universal banks in recent years. A further aim is to investigate how integrated risk management and top-level management is in Swedish universal banks and if they perceive this integration to be sufficient. Furthermore, the aim is to investigate what opinion Swedish universal banks have regarding Basel II’s current impact and Basel III’s future impact on risk management. We intend to further present a discussion in which we express our reflections and assessments regarding the subject of the thesis. Method: To answer the research question we have performed a qualitative interview study, hence conducted interviews in four Swedish universal banks. In order to gain a deeper understanding regarding the Basel Accord a major review of prior research and publications in the area of Basel has been carried out. In addition a thorough research in the area of risk management has been conducted. The empirical evidence is analyzed by means of the presented Frame of Reference. Analysis and Conclusion: The empirical findings indicate a rather highly developed risk management in the Swedish universal banks. The main perception among the banks is that there is no need to increase the level of risk awareness and the degree of consideration of risks in the Swedish universal banks. However, there is evidence showing increasing risk awareness during the past years, which is mainly a consequence of the financial crisis. There seems to be a consistent shortsightedness among the banks regarding risk assessment. Quantification of risks seems to facilitate a greater consideration of risk in top-level management, however problems arise due to an extensive trust in absolute risk figures. There seems to be a generally positive expressed opinion regarding the Basel Accord, where the framework of Basel II appears to have affected the banks’ risk management, whilst the perception is that the Basel III’s impact on risk management will be less comprehensive.