Rightly assessing risk

Business and risk have always been seen to go hand-in-hand. The higher the risk, the higher the return.

The recovery period over the past five years since the global recession has become even more difficult to navigate because of the distress in the eurozone and fiscal tightening around the world. Many organisations have had to scale back on their high-risk strategies in an attempt to stabilise their portfolios. As such, the need for banks to strengthen their risk management framework has become vital.

In the period before the global meltdown of financial markets, most organisations had structured themselves into disparate silos, especially within risk, which led to less than satisfactory collaboration. It undermined the status of risk in the organisational hierarchy and, most notably, it obscured the true risk profile of the financial institution. This approach also undermined the development of the organisation as a whole, as different divisions were implementing systems and operational processes that did not complement each other.

Furthermore, as the information available to senior managers on the risks of business strategies was insufficient, a false sense of security was fostered, which, in turn, could lead to sub-optimal business decisions being taken.

In fact, recent research we conducted shows only 5% of risk managers are actually equipped with the information needed to do their jobs in the most agile fashion, while 38% said it takes more than four hours to get the latest data after the markets have changed. And yet, when timely information on risks can be obtained, firms will inevitably find it easier to quickly react to changing market conditions and strengthen their forecasts of future market conditions.

Without this, it’s near impossible to do the job as effectively as needed and could, in fact, lead to the incorrect decision being made.

To mitigate the situation, financial institutions need to work towards fully integrated infrastructures that provide a holistic, visually stimulating overview of the risks faced by the organisation. Our data also reveals that, when presented with data, a large percentage of it (42%) is still presented in a static spreadsheet format, with more than one-third (34%) unable to drill further down into the information to get detailed insights.

As the financial markets change so quickly, risk managers need to be able to quickly change their minds on the parts of the business to be analysed. Whether they need to know their exposure to Spanish debt or how sensitive their US portfolio is to the oil price, they must be prepared with data systems that will let them conduct this analysis quickly.

So, an integrated infrastructure in itself is not sufficient; there is also a need for sophisticated, readily available analytical techniques and strong lines of communication between different departments so that senior managers can remain cognisant of the risk profile of the firm.

To this end, solutions that are available need to include interactive risk dashboards that can be tailored and adjusted to individual requirements and allow for agile risk analysis, and the extract transform load model, which ensures that all personnel are making decisions based on the same set of data.