Introduction

As a result of the economic credit crisis of the last year and a half, the role of the risk manager has been given greater importance. The risk manager’s previously diminished role was partly a result of the belief that risk management methodologies have been unable to keep pace with the high octane pace set by the various trading desks.  Regulators are ensuring that banks are able to capture and report all aspects of its risk profile, gathering as much data as possible in doing so. This then seems to be leading to a move for risk departments to move to real-time to allow them to catch greater and more up to date information.

Key findings

• Current practice – The risk management methods such as end of day VaR and liquidity calculations currently used by banks are very similar to those that were being used on the eve of the credit crisis. Although VaR has been heavily criticised, it is still found to be effective when supported with greater stress and scenario testing.
• Drivers – Regulatory pressure on industry practitioners to provide greater and more transparent data. Heavy fines will be handed out to those who do not comply.  Although senior managers, in reaction to regulatory pressure, want to see more up to date figures, they are currently unsure as to the gains from an enterprise wide move to real-time risk management.
• Strategy – Research has found that most of the banks spoken to are yet to move to enterprise wide real-time risk management. Though VaR and liquidity models are calculated at the end of day, real-time stress testing has been universally adopted.
• Benefits and Challenges – It can be concluded that banks currently believe that costs of real-time risk management heavily outweigh the modest benefits. Obvious benefits such as greater accuracy of risk positions, with information being captured, analysed and reported after individual trades are offset by the cost and time issues involved with utilising the tools.

Conclusion

While there are obvious benefits to real-time risk management relating to greater accuracy to risk positions and transparency, the general consensus from banks is that the switch over is a costly and complex undertaking. It seems as though there is a greater demand for the voice of the risk manager to be heard by board members, although the information they are parlaying in these meetings is not as of yet exclusively calculated in real-time. It may just take the heavy hand of the regulatory bodies to convince banks of its worth sooner rather than later.

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