Risk Management Technology
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E-Trade Turns to Agile Response Team for Rapid Risk Analysis
April 13, 2009
Online brokerage E-Trade Financial Corp. is looking to its home-loan division--which has ravaged its bottom line--as it attempts to build teams of technologists and business analysts to more rapidly assess and manage risks.
To help cut its loan losses, which hit $1 billion last year, E-Trade has tried to identify the data it needs to better model its risks and report those risks to executives more quickly. With provisions for loan losses still running in the hundreds of millions of dollars a quarter, agile risk management has become paramount.
"Being able to do it in days and weeks, not months and quarters, is very important," said T.J. Shea, director of credit risk analysis for E-Trade.
In addition to E-Trade's loan business, which included $13 billion in mortgages and $10 billion in home equity loans at the end of 2008, Shea's group supports institutional trading. In the fourth quarter, E-Trade's institutional business accounted for $484.4 million in commission and interest income, compared to $461.1 million for its retail unit. But high-interest expenses and a $512.9 million provision for loan losses led to a $491.5 million loss.
Fast Enough?
However, "days and weeks" isn't nearly fast enough to analyze risk in volatile markets. "In the securities industry, certain types of risk, like market risk, happen second by second," said David Furlonger, VP and investment industry analyst at Gartner. "Being able to have an architecture that copes with that is going to be vital."
Organizationally, E-Trade's agile risk approach, which Shea has been developing since he joined in 2005, is built for speed. The firm has integrated the business analysts who examine holdings and forecast exposure to risk; technical specialists who figure out how to extract the right information from economic, market, customer and loan sources; and staffers who maintain data on the performance status of "several hundred thousand loans," said Shea at a Gartner conference in Washington, D.C. last month.
"We do not have a [data integration] team and a Web reporting team and an analytic and forecasting team," he said. "We have one team that is responsible for a business function--risk analysis. And we are fully integrated to deliver and manage results."
The risk team uses an enterprise business intelligence platform from SAS Institute that can pull together and analyze data from diverse sources, including IBM, Oracle and Microsoft databases. Cary, N.C.-based SAS also supplies E-Trade with Web Report Studio, which delivers online reports to users, and Enterprise Guide, software that allows technically adept users to develop or fine-tune reports and forecasts.
But just as important as the organizational structure and technology are the team members, who Shea cross-trains to perform all functions, from information extraction to operating the data store, to analyzing and forecasting results.
E-Trade looks for both business and technical talent, said Shea, but usually the staff is home-grown. Their first task? Running the code that extracts and transforms data on the $30 billion worth of loans that have shown up on E-Trade's books from internal sales, and businesses and portfolios it has acquired. "It helps them understand how the data works, what the data processing problems are, how it's put together and [gives them] an appreciation for how the whole process works," said Shea.
