Improving Risk Management to Create Competitive Advantage
by Julio Gomez, Founder and President, Gomez Markets
To paraphrase the late Tip O’Neil, all financial services is risk. How long will you live? I’ll insure you. How much do you make? I’ll lend to you. What are the company’s prospects? I’ll buy a piece of you. In these and hundreds of other scenarios across banking, brokerage, and insurance, risk bets are made that define the fortunes and failures of financial institutions. At their core, financial institutions are buyers and sellers of risk.
What challenges firms managing risk today is the convergence of two inexorable trends: increasing complexity and decreasing timeframes. Contrast financing a vessel (and waiting more than a year for your “ship to come in”) with today’s global, multi-asset class, multi-currency electronic trading. Clearly the shape of risk is changing – and in real-time. Leading firms will respond by leveraging tools and technologies in three ways to build competitive advantage:
- Extend risk management systems to more business processes. Historically, most risk calculations were done as part of reporting activities that relied on receiving data that had already made its way through an origination or trading process. Increasingly the capacity to run analytics that calculate risk can be found at each step in the process, allowing both improved data quality and increased frequency of risk awareness.
- Leverage SOA and data integration initiatives to advance ERM. Much of the regulatory pressure from legislation including Sarbanes-Oxley and Basel II has had the unintended consequence of accelerating enterprise initiatives in service-oriented architecture and data integration and management. There has been significant energy expended attacking the problem of pulling data from disparate systems together. Leading firms are using these new capabilities to improve intra-company reporting of risk-related data and push towards an Enterprise Risk Management framework.
- Push risk management systems to real-time. Of course, the ultimate goal is to move all of these capabilities to a real-time environment. Databases are straining under the load imposed by complex risk calculations that need frequent updating. As firms scale their operations and as transaction and message volumes of all types grow, the database approach is yielding more and more ground to real-time environments, such as complex event processing.
Financial institutions of all types covet competitive advantage. Success in this endeavor provides opportunity for building competitive advantage in the marketplace. In order to handle increasing complexity and decreasing timeframes better than the competition it is critical for firms to access data from disparate systems in a highly automated, efficient, and accurate way and run analytics in real time. Those that do will emerge as the best buyers and sellers of risk – and will be rewarded accordingly.