Risk Management
Evolutionary Strides for Operational Risk Management | CROs Share Lessons Learned | Uneven Risk Management Progress in Asia | The Changing Face of Security | Learning to Share: Big Obstacles for ERM
Learning to Share: Big Obstacles for ERM
Standardization, corporate governance pose challenges to enterprisewide view of risk
July 14, 2008
The touted benefits of enterprisewide risk management, or ERM, are plentiful: It frees up regulatory capital, lowers operational costs, brings transparency to loss exposures, and helps firms avoid defaults and more-efficiently allocate capital, to name a few. But the credit crunch and several well-publicized trading fiascos have prompted many to ask how, and even whether, ERM can be achieved.
Enterprisewide risk management is one of a handful of terms currently in vogue with C-level executives and software vendors specializing in risk. "Integrated risk management typically refers to the integration of credit risk and market risk, while enterprisewide risk management is the integration of all aspects of a firm's financial management," explains Charles Smithson, founding partner of Rutter Associates, a New York-based risk management consultancy. "Holistic risk management is often used interchangeably with integrated risk management."
Although financial institutions are spending millions of dollars on internal and licensed third-party packages for ERM, their efforts are falling short, according to Alan Grody, president of consulting firm Financial InterGroup in New York. "There is little or no sharing of information across market, credit and operational risk systems," says Grody. "Without this sharing, risks are not netted across different trading books and markets and the impact of external and internal events across the entire business cannot be evaluated."
Miles Everson, partner at PricewaterhouseCoopers (PwC), agrees. "Specialist risk managers don't necessarily have to be housed in the same unit but they should be able to collaborate," he notes. "It's not a matter of centralization or decentralization of risk management but the need for a firm to understand the amount of standardization and differentiation required among the types of risk calculation."
Standardization necessitates consistent management of data, as well as business intelligence. "Rather than the many discrete efforts at leveraging intelligence that financial services firms may be pursuing in siloed business and technology areas, there should be a holistic approach to discovering, mining, managing and leveraging data information and knowledge," observes Rodney Nelsestuen, senior analyst for Needham, Mass.-based TowerGroup.
Business lines often operate independently and access core systems to varying degrees in creating their own set of master data, according to Nelsestuen. The business functions store and use information in different ways, resulting in duplication of data. And while each unit's data may be correct, duplicative sources increase the possibility of users getting two different answers to the same question.
"While risk can be identified across all data sources, risk managers often look at narrowly crafted reports from siloed systems when scanning for early trends," says Nelsestuen. "The key to acquiring and managing data effectively lies not in a single silver-bullet solution, but an improved architectural approach to organizing technology around business and then governing it for value."
Philippe Stephan, global head of business development at Dublin-based portfolio and risk management software provider Sophis, acknowledges that inconsistent data hampers even the most sophisticated technology for measuring market and credit exposure on an enterprisewide basis. "Any system receiving data from multiple silos can only develop a good approximation of risk," Stephan says. For large firms, "receiving data in multiple units can be problematic because the delivery will not be in real time or as quick as required."
Everson of PwC says that firms are recognizing that "the product set has become so complex that they need to understand their exposures to asset classes across business lines and the performance of the underlying markets which affect their valuations."
