As it stands, global investment banks are at different stages in the move to real-time risk management. However, all agreed that the ability to aggregate global data and take snapshots of their risk position is essential not only to react to extreme scenarios but also for risk events that occur every day.
While these insights are by no means ground-breaking and have been discussed at an industry wide level for some time, the report goes on to outline what is needed to rectify the situation. One of the main problems the report highlighted was data quality and accessibility for both traders at the coalface and risk decision makers. Without an up-to-date, business-wide view of their positions and trades, firms are unable to determine their aggregate risk exposures during the day. This can lead to higher than desired intra-day exposures and gaming - which often remain undetected - the result of traders closing out positions before the end of the day. It also leads to inaccurate hedging, and missed opportunities.
In addition to these strains on the bottom line, chief risk officers have been increasingly put under pressure, with regulators baring their teeth following the financial crisis. The FSA has imposed a more stringent programme of stress tests, the Basel Committee has been hardening its internal model approach and the radical changes brought about by the Dodd-Frank Act are beginning to make themselves felt.
Im sure Im not alone in saying that real time risk management solutions are long overdue with the benefits of such an approach far-reaching. Critical stress testing scenarios can be completed with far greater ease, banks can prepare for the impact brought about by changes in the values of financial instruments (resulting in fewer losses), firm-wide scenarios analysis would help banks ready themselves for Black Swan type events. In addition, a real time risk solution would minimise constraints on liquidity brought about by unforeseen reductions in instrument and market values, including reducing counterparty risk and making allocation of capital far more efficient.
However, for this to be possible, risk managers would need to achieve a complete picture of all the different positions and trades at any given time in order to ascertain an accurate view of their risk exposure. Given the siloed nature of investment banks coupled with the multitude of different systems which are running between lines of business and desks, the majority of risk managers within investment banks have quite a challenge ahead of them and will require the use of smarter and more agile technology.
The case for a real time risk solution is clear. While this will mean substantial investments of both time and money, it will surely be a price worth paying if a bank is to stay on top.
Dale Stevens is head of capital markets at SAS UK