As financial institutions have become more complex, so have their risk management systems – and that’s a problem.
Organisations that have grown through acquisition and diversification typically find themselves running a huge number of different systems: whether for different asset classes, different types of risk and/or for different operating entities.
That complexity is causing major issues. Research carried out by the Professional Risk Managers International Association (PRMIA) in March 2013 revealed that “getting a complete view of risk from multiple risk systems” is the top technology challenge faced by buy-side firms.
As the regulatory environment tightens in the wake of the financial crisis, it’s a challenge that firms can’t afford to ignore. Trying to aggregate data from different risk systems into a single view is fraught with issues. The variations between systems lie not only in the types of model used to calculate the risk, but also in the way the underlying data is structured and handled.
Risk management horror stories
Horror stories abound: one firm found its balance sheet to be inaccurate to the tune of several billion euros because it had misinterpreted a scaling factor used by one of its operating entities. Errors like this can easily occur in a highly complex systems environment, and the possibility that the data may not be 100% accurate means senior management end up making critical business decisions based on data that they do not wholly trust.
With supervisors taking a keener interest in how risk is calculated and aggregated, more than three-quarters of the companies polled by PRMIA said they planned to change their risk management systems in an attempt to gain an accurate, traceable and dependable enterprise-wide view of risk.
Two common approaches: neither very attractive
It’s not a project that many organisations relish, however. Traditionally, the two most common ways of achieving (or trying to achieve) a single view of risk are:
1. A “Big Data” approach, where multiple separate systems are thrown out and replaced with one single enterprise-wide risk management system.
2. A “Big Piping” approach, where data from the existing systems is “piped” into a central data warehouse for the relevant calculations and analysis to be performed.
In practice, the first of these almost always turns out to be prohibitively expensive and disruptive. As well as being a huge and highly risky IT project, it also means that many perfectly serviceable systems – often home-grown ones with advanced, proprietary models – are sacrificed for the greater good.
The second is generally the preferred approach, but implementing a central warehouse and integrating existing systems with it is also a long, expensive and cumbersome project. (One insurer we know found that after 18 months of work, it was still only in a position to bring 20% of its risk data into the data warehouse).
European institutions are choosing a third way
At SecondFloor we have pioneered a third way, and it’s already being used to accurately manage and aggregate risk data at some of Europe’s largest and most complex financialinstitutions. Our data orchestration tool, eFrame, works with existing risk systems to standardise the data and create a complete, automated governance framework so that every data point is checked, approved and traceable to its source. Senior management can then conduct the relevant analyses on data they know is accurate and reliable.
That’s important not just for complying with regulations ranging from Basel III and Solvency II to IFRS IV and IX – but also, and most importantly, for the quality of internal risk management. When everyone can agree on a single set of risk data, aggregated accurately from the multiple risk systems present in the business, then the tasks of setting risk tolerance parameters, creating a risk dashboard and allocating economic capital all become incomparably easier.
Find out more
If you’d like to know more about how eFrame© can help your organisation to gain a consistent, accurate and dependable view of risk, we’re happy to offer an initial phone consultation free of charge. Call us on +31 (0) 88 26 35 463 or email info@secondfloor.com, and we will be glad to help.
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