After outlining the four main buckets of risk that banks have to tame: market, credit, liquidity and operational; the real issue is the bank’s structure.
Historically, banks have been built in product silos and hence there is no sense of enterprise risk.
The retail and commercial bank secures funding through the investment bank, but none of these three divisions sees the totality of their exposures.
Even more telling is that bubbling underneath these three major divisions are more: mortgage, loans, trade finance, asset and liability management …. so many layers and complexities and so little integration.
Then, to just to make it even more difficult, banks built systems over the years that cemented the silo and divisional fragmentation of risk across the organisation.
As banks emerged into global giants in the last decade, this fragmentation became even more complex as risk spread across the world’s regions, and the simplistic view that a bank could see its enterprise risk failed.
That is in part the reason for the global financial crisis, as counterparty risk failed.
When Lehman Brothers exploded, the bank had $400 billion of debt on its books but, according to Barclays' analysis, this bad debt was linked with $8 trillion of credit default swaps contracts.
That was the core source of the crisis, as this led to a counterparty trust meltdown and the new global giants lost access to funding and, therefore, liquidity.
Today, we are trying to tame that beast by internal and external change.
Regulators forcing banks to increase capital reserves and decrease the weaknesses in systemically important financial institutions are one key change.
But another has to be the move to gaining a handle on enterprise risk, and the only way banks are going to manage that beast is through technology.
The reason is that the divisions, silos and geographic fragmentations will continue to persist.
These holes in the bank network are where the market, credit, liquidity and operational risks can occur.
It is these holes that need to be stitched together and technology is the way to do that.
An Enterprise Risk Management System (ERMS) is not easy, as nothing that has Enterprise in its title is easy in a bank.
Divisional leaders and country heads are not happy to see all their data flowing transparently into a central hub that can be viewed continuously by their management.
It doesn’t matter though, as that reporting is exactly what the regulators are now requiring.
Trade and liquidity reporting in real-time is becoming a mandate from many regulatory overseers, and a bank that has not found a way of installing an ERMS will find itself not only on the wrong side of their regulator but potentially on the wrong side of their counterparties too.