Getting Risk Systems to Ask the Right Questions
December 15, 2008
Contrary to what one might expect at this point in the global financial crisis, investment bankers are not complaining bitterly about the shortcomings of risk technology--nor are they rushing to order more of it.
Financial technology giant SunGard Data Systems cites an example that may offer some insight. The company's Adaptiv risk management software was recently chosen to replace a system at a financial firm with large positions in credit risk.
The institution's risk system was churning out reports that were passed around and occasionally commented on, but risk management was not part of the decisionmaking process. A massive concentration in credit risk was built up without it ever being factored into the firm's risk management.
"There was no link to say, 'we have a limit on this,' or, 'you have to charge more for it because it is riskier from a systemic risk perspective,'" said Jonathan York, VP of SunGard's BancWare ERisk business. "If they had turned it off, it wouldn't have changed any decision." That's not so unusual, said York. "Lots of organizations have risk as an ancillary activity."
Right now business units are the first line of defense in risk management, said Tim Bezencon, ANZ Banking Group's chief risk officer for Northeast Asia, at a recent symposium in Hong Kong. However, that is apt to change as boards and regulators demand a greater, and more clearly defined, role for risk management--one that enables it to overcome the influence of star traders on a roll. "We have a window of opportunity and influence in this crisis that we haven't had before as professionals," said Bezencon.
At a recent user group meeting for Adaptiv, Mat Newman, SunGard's head of product management, said he asked clients if the system was meeting their needs. "The general feeling was that the systems did what they were asked to do," noted Newman. "The bigger issue was whether they were asking the right questions. Many institutions had placed a lot of emphasis on regular VaR [value at risk] and back-testing and maybe not enough on stress-testing."
Challenging Models
While a panacea for controlling financial risk has not emerged, several distinct trends are becoming clear, including a need to look beyond models. Many risk professionals agree that firms are relying too heavily on models, without fully examining the assumptions on which they are based. "Risk should be thought of as a process rather than a number," said Andrew Aziz, EVP of risk solutions at Toronto-based Algorithmics.
There is also an increased focus on linking market and credit risk. Global banks usually have separate market risk and credit risk divisions, according to Cubillas Ding, senior analyst at Boston-based Celent. Risk managers are looking for ways to reflect the interplay between the two types of risk.
Convergence will happen soon, said Gregg Berman, who heads the risk business at RiskMetrics Group of New York, a provider of risk management and corporate governance products. "The complexity is mostly the result of a silo approach to looking at the two types of risk," he said. "This has been stagnant over a number of years even though the tools and technology exist to bring them together. The blending of credit and market risk is going to come very quickly."
