- Banks
- Enterprise-wide risk management
- Bank Strategy & Profitability Management
- Treasury and Asset Liability Management
- Liquidity Risk Management
- Credit Risk Management
- Market Risk Management
- Applied financial engineering
- Basel II and regulatory compliance
- Compliance, regulatory and statutory reporting
- Systems integration
- Training and seminars
- Asset manager
- Insurance Companies
- Corporates
Enterprise-wide risk management
Changing demands of markets and regulators
Interest rate risk and currency risk management approaches in the banking industry are currently being fundamentally overhauled. This is not only because of the increased scrutiny of supervisors, but much more so because of a general acknowledgement that modern risk management systems release significant potential for increasing earnings and boosting success. It is no coincidence that the most successful banks have been at the forefront of the trend towards a risk-based (rather than asset-based) management culture, and an increased use of scenario-based business planning and earnings forecasts, including drill-downs into the separate identifiable earnings components across their organizations.
This situation is set against the backdrop of a general move from a formerly earnings-based towards a more (present) value-based management of the entire business, including the banking book, enshrined in guidance and rules set by the Basel Committee and the CEBS (in particular regarding Pillar 2 and stress tests), the FSA (in the Prudential Sourcebook(s)), and the IASB (in the IFRS reporting standards).
Many banks and building societies running large mortgage books, however, still have room for improvement as far as technical support for such an enterprise-wide risk (and business) management approach is concerned. Thus these institutions are particularly affected by the changing landscape. More often than not, the new challenges can only be tackled on the basis of simplified assumptions and approximations, and with a high degree of manual overlay.
Building blocks for a modern enterprise-wide risk management system
Modern enterprise-wide risk management systems enable an institution to better understand risks and associated rewards, and thus unearth and exploit formerly hidden potential for increased profits. It comprises the following components:
- An integrated view of lending and trading activities which forms the foundation of any bank-wide risk management system
- The use of modern analytical methods, ranging from gap reports and sensitivity and scenario analyses, via value-at-risk assessments and stress tests, to risk-adjusted performance measures and adequate funds transfer pricing mechanisms, which will enable the effective and comprehensive management of risks versus returns
- Adequate consideration of optionality embedded in trading or lending transactions (explicitly or implicitly, depending on jurisdiction and/or customer behavioural models) which will capture all risk components, forming a basis for an informed and efficient use of modern hedging instruments
The short-term implementation of a modern bank-wide risk management programme is a challenging undertaking. This particularly applies to mortgage books where individual risk components are not (or not adequately) mapped to the transactions in the source systems. Nevertheless, it is by no means impossible to modernize bank-wide risk management systems within a reasonable timeframe.
The increasing stringency of regulatory supervision and the stipulations set out in international and national accounting standards mean that risk and ALM systems are becoming ever more closely integrated with external reporting. For example, a modern risk management system will be able to integrate IFRS compliant functionality, such as transaction valuation and present value consideration of collateral. This will, however, require a significant increase in data quality.
Benchmarking your institution against the industry
- How do you compare to your competitors?
- Are you capturing and monitoring all relevant risk components (e.g. embedded options)?
- How much will you have to invest in the coming years to implement a modern bank-wide risk management approach?
For some rapid initial answers to such questions, d-fine offers you a "QuickCheck" service which will help you to identify your strengths and weaknesses.
