Introduction

The speed at which today’s global financial markets operate is both mind blowing and indeed, continuing to increase. Allied to the incredible pace of business is the continued growth in the volumes of business that are being seen across most major asset classes – with the one notable and obvious exception being the structured credit market. In information intensive industries such as banking, technology is absolutely integral in coping with the speed and scale of the business being executed. Implementing the most sophisticated, robust, and cutting edge solutions will ensure that banks are best placed for operation in today’s highly dynamic and unpredictable market environment

It is interesting to note that whilst product innovation in the financial services industry has moved at an unprecedented rate in recent years, evident from the range of increasingly complex products offered by institutions until recently, it has been suggested that the risk technologies in place to support and manage such products were at best inefficient and at worst, incapable. Of course, technology provision is by no means solely to blame for what has occurred over the past year. However, the credit crisis has highlighted the fact banks must leverage the most innovative and cutting edge risk management systems (and of course associated processes) to prosper in an industry where the cost of mistakes is no longer measured in terms of dollars, pounds and euro’s lost but rather in the existence of an institution.

Key findings

• Risk expenditure – Although it was acknowledged that it is indeed a tough time to get expenditure and budgets approved, most of the different banks spoken to see risk, and more importantly risk IT as an area where spend should generally increase in the next 12-24 months.
• Priorities going forward – It is of no surprise that that the banks want faster systems and better analytics, that enable them to spend more time on in-depth analysis as opposed to less relevant tasks and responsibilities. Moving risk disciplines to be part of a continuous process instead of a periodic one was another priority that was highlighted during the discussions.
• Current practice – As is to be expected, when asked to identify whether their banks’ approach to risk control and monitoring was a pro-active one or more reactive, all of the interviewed banks explained to Lepus that there is a combination of both. Therefore it goes without saying that establishing sound frameworks and having the right technologies in place will help an institution be more informed and prepared to react promptly when there is a need to do so.
• Monitoring and controlling risk – It is of no surprise that when posed with the question of whether they seek to increase and enhance monitoring and control across their risk streams, all of the interviewees expressed the desire to do so as we go forward. What the current financial crisis has brought to light, is the fact that the various risk streams are not mutually exclusive or independent as once perceived. The ability to monitor and approach risk in a more cohesive and controlled manner will be imperative. The solutions that are used to address these co-dependencies will be paramount.
• Getting the full picture – Although this will vary by bank, providing management with an accurate view of enterprise risk is clearly a priority for all of the organisations spoken to. Even though, to a certain extent, it may be possible to develop an enterprise view through a selection of reports obtained from the various incumbent solutions, there is a need to rely on a more dedicated solution. A solution able to provision cross-asset visibility that the increasingly complex and rapid environments of today warrant.
• Manual intervention and involvement – It was agreed by the participating banks that there is a need for greater detail and the ability to disclose this to management and the relevant stakeholder. It is of no surprise that reducing levels of manual involvement and intervention in various processes and tasks is a common goal for the financial services industry.
• The way forward – Technology can help in identifying and informing the relevant stakeholders of potential threats that may arise over time. There is an absolute need to adopt cutting edge and robust solutions that complement a set of sophisticated and contemporary methodologies and processes. Ultimately, the cost of not investing is and can be much larger than that associated with investing in new solutions.
• Perceived benefits – As established during the interviews there is a need to break down the traditional siloed approach and manage risk in a more holistic way. Banks need to adopt a global approach, minimising any anomalies that may be present across regions and where feasible. Implementing such cutting edge technologies will enable banks to enhance aggregation capabilities and enable more rapid in-depth analysis. Increased automation results in the reduction of manually intensive tasks, enabling key staff to focus on more meaningful responsibilities.

Conclusion

The ongoing crisis has accentuated the need to adopt more cutting edge technologies and processes for the purposes of more effective risk management. The banks were united and unanimous about the selection of tangible benefits that such a solution would bring to their organisation.

There are going to be some changes in the way banks have to manage  and disclose their risk exposure both internally as well as externally. In order to address the increasing complexity, the need to identify, control, comply, monitor and deliver the right information to the right people at the right time, banks will have to invest in and adopt the most innovative, robust and cutting edge solutions that will facilitate this.

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Tagged with: 2008, Executive Summary, risk monitoring