Introduction

Much has been said about risk divisions, particularly in the wake of the brutal financial meltdown last year. However, risk divisions are upping their game in changing the methods of how they do business. Though banks may not agree on which areas of market and credit risk should overlap at present, the move to integrate the two is definitely on the cards for the future.

Integration of credit and market risk has been on the cards for a long time. There are many reasons for this that shall be expanded on in this report. However, in light of the financial furore at the end of last year, banks have been forced to reassess the way they manage risk and consequently they have begun to look more seriously at aligning the activities and responsibilities of credit and market risk.

Key findings

• Overview of the market – Current regulation is conceptually based upon the distinction between market and credit risk. However, some risk factors may also influence both market and credit risk.
• Benefits of merging credit and market risk – Banks said that they had noticed a decline in the number of firms that now had separate credit and market risk divisions. The key benefits of amalgamating the two divisions are cross fertilisation, blend of skills, and greater communication between the divisions.
• Systems silo – While the divisions are often merged, banks have stressed that they still have a separate system dedicated to credit risk calculations and another separate one from market risk calculations. Systems innovations are not likely to change imminently in order to keep up with these changes. 

Conclusion

There has been significant progress made in the merging of credit and market risk divisions in financial institutions in recent times. However, there is still work to be done in this area. It is by no means complete. For those firms that have merged the divisions, they still have separate systems and skill sets. As one commentator said, it is all very well wanting to merge the two divisions but there is no distinctive system to support the two methodologies at the moment. From research Lepus conducted, it is clear that such a development is all a long way off.  

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Tagged with: 2009, credit risk, market risk, risk, Risk Research Report