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Confidence in the New Risk Management Landscape

Published on 22 Jan 2013

Posted by Stuart Grant, Solutions Expert, SAP

The demands of upcoming regulatory requirements put evermore pressure on financial institutions and their risk management infrastructures. As a result, data and analytics must be fast, consistent and transparent.

Meeting these demands will require financial institutions to invest in specific areas, creating new business and technology strategies. 60 per cent of firms admit to having too little data integration between front office pricing and decision points with the middle/back office market, according to a survey by research and consulting firm, Celent. Additionally, more than 40 per cent of tier one firms are looking for the front office to possess and execute risk-aligned tools, analytics and metrics in an automated manner.

Banks should be more concerned about accuracy of data than risk aggregation speed, according to the U.K. regulator body, the Financial Services Authority, as outlined in the Basel Committee on Banking Supervision’s June paper (BCBS222) on effective principles risk data aggregation and reporting.

Banks should be able to generate aggregate and up-to-date risk data in a timely manner and across all Lines of Business, according to the paper. Regulatory pressure should never compromise a bank’s quest for accuracy, Sampson noted, even if timeliness has to take the back seat. Whilst this paper outlines the near term focus on the top Globally Systemic Organisations its reach will extend through to multi-nationals and Emerging Market banks who could use first mover advantage to gain a jump in their market standing by reducing the stress that regulatory focus places on a banks resources and allows a firm to concentrate on core business execution. What has been outlined should pose no problem for a brand new organisation, however, the complexity that exists in the most developed firms will prove to be a barrier if not addressed quickly and with commitment. Whilst many organisations boast the most advanced technology and processes within the front office, none have achieved a consistent approach extending through middle and back office functions. Moreover, firms need to focus on how to turn what is likely to be a spend in the $100m-$500m range over the next five years into a competitive advantage by providing an accurate and timely source of valuable insight back to the front office.

Performance and risk measures must fall in line with the front office to ensure better trading decisions, stronger controls and an accurate picture of profitability, according to Celent’s report. Eighty per cent of tier one firms are looking to achieve tighter alignment with risk technology and operations in relation to front office processes.

Senior executives from more than 15 tier one capital markets firms and wholesale banks participated in Celent’s study, which guided much of our seminar’s discussion. Basel III, CVA, liquidity regulations and Dodd-Frank reforms are the main concerns for impact on trading desks and risk infrastructure in the coming years, the Celent survey found.

The last drafts on these regulatory regimes are far from final, making their impacts unclear. So financial institutions are understandably cautious about laying the groundwork today for compliance tomorrow.

But no matter how future regulations unfold, firms will have to make certain shifts. They will include the following investments by senior executives:

§ Innovation

§ A change in culture

§ The tools required - invest in technology

§ A strong risk strategy

Embracing these changes will help turn the three pressures that I mentioned at the beginning - technology regulation and competition - into advantages. A new technology infrastructure will help you outmaneuver your competition and complying with impending regulatory changes.