RiskTech Forum

Run the bank vs Change the bank

Posted: 19 October 2012  |  Author: Peyman Mestchian, Chartis Research

In the aftermath of the financial crisis, financial institutions face increased regulation, falling profitability, and the need to update their risk management systems to keep pace with faster and more complex market conditions. These challenges require the re-alignment of risk management practices and the introduction of robust technology systems.

These goals all require long-term (up to five years) strategic projects to be successful. However, many regulations are coming into force in the next 6-12 months and firms need to be ready to comply. Long-term goals and projects may be undermined by short-term requirements; the run-the-bank requirements may prevent the firm from putting change-the-bank plans into practice. For many banks the temptation to take a short-term, cheap, and reactive approach is very strong. A tactical approach will satisfy boards that see compliance as a box-ticking exercise and are seeking the minimum outlay possible.

Financial institutions that do this risk incurring long-term costs, however, from not upgrading their systems. They will be left with fragmentary, silo-based systems that do little to solve the risk management problems that emerged during the crisis. These fragmentary systems will solve only the immediate challenges, rather than the on-going deficiencies of risk management practices and the challenges of the future. At the same time, costs will not decrease as time goes on, but will continue at the same level or even increase.

Committing to a long-term strategic plan to invest in risk management technology instead will help firms to turn risk management into a valuable resource for the firm. Improved risk management will allow the introduction of risk-adjusted performance measures, thus improving the long-term performance of the bank. They will also allow the risk function and technology systems to become more efficient, cutting costs in the long-term. Additionally, developing their risk technology systems will allow firms to gain an enterprise-wide view of risk and to have real-time views of risk, allowing them to respond more quickly and accurately to risk.

Firms need to be able to deal with short-term requirements as well as committing to a long-term strategic plan to change the way they manage risk. A tactical solution to meet immediate needs may be necessary for firms to continue to run the bank, but it should also be accompanied by a plan to make the firm’s risk management capabilities fit for the next decade.