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Technology: taming the risk beast

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.



About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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  • Rick huckstep

    A very good article. Not only are regulators demanding greater visibility of a centralised and consolidated view across the silos within a bank, they are also going to want to standardise this level of reporting across banks, not just within banks. This will add a further burden and increase the demand for comprehensive ERMS that can meet both domestic and international standards.

  • I’ve been diagnosed as an A to D personality. I don’t need B or C t get there. So it’s always been baffling to me that banks haven’t had the leadership that really understands how technology needs to drive change. 90% of what we do is not achieving the core goal of getting technology out of the way of the business.
    The business seems satisfied in owning the P+L and the budget, but none of the understanding. Bankers who really get technology are a rare breed, and can turn around the share price of a bank if they get it right…
    If you’re a banker and you don’t know why APIs are a bet the company level of importance… I worry about your employer.