Data strategies for risk management
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Transcript of Data strategies for risk management
Effective Data Strategies for Risk Management
2© Hexaware Technologies. All rights reserved.
Top Nine Risks An FI Fears
Risk Types Definition
Market Risk Change in financial markets affects value of a portfolio/firm
Credit Risk Change in the credit worthiness of a borrower affects the value of a loan/portfolio
Counterparty Risk Counterparty may fail to honor a commitment to make payments
Liquidity Risk Inability to raise cash, or risk of not being able to execute a transaction at prevailing prices
Operational Risk Risks arising out of inadequate systems, management failure, human error, fraud, etc.
Legal/Regulatory Risk Impact due to changes in legal or compliance burdens
Business Risk Risks due to randomness or uncertainty of product demand, prices, etc.
Strategic Risk Risk of investments that has high uncertainty of financial success
Reputation Risk Risks arising out of rumors, scandals, or true corporate mismanagement that results in loss of reputation
Treatment in Banks Today
Treatment in Banks in the Future
Risks are treated in “SILOS” Integration of related risks through ERM
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COSO’s Framework For Enterprise-wide Risk Management (ERM)
Components/Layers Brief Review of the components
Internal environment Organization’s philosophy for managing risk (risk appetite and tolerance, values, etc.)
Objective setting Identify specific goals that may be influenced by risk events
Event identification Recognize internal or external events that affect the goals
Risk assessment Consider the probability of an event and its impact on organizational goals
Risk response Determine the organization’s responses to risk events such as avoiding, accepting, reducing, or sharing
Control activities Activities to focus on operational aspects to ensure effective execution of the risk response
Information and communication
Inform stakeholders of relevant information
Monitoring Continuously evaluate the risk management processes
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How Has ERM Progressed?
Surveys referred to:
Treasury and Risk ERM Survey 2008 and 2010, symbolically signify before and after the crisis
An independent survey by a leading consulting firm in 2010 to identify trends in ERM
For brevity purpose, we have chosen relevant questions and responses from the surveys
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Survey Results - I
• Companies seem to have their objectives/risk appetite and tolerance clearly articulated more in 2010 than 2008
• Companies seem to have integrated risk management with their strategic planning process more in 2010 than 2008
2008 2010
Question: To what extent do you agree or disagree with the following statements regarding ERM?
Source: 2008 and 2010 Treasury and Risk ERM Survey
Take Away
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Survey Results - II
• Companies seem to be moving away from defensive risk management practice to more pro-active risk management with more of them citing business value enhancement, decreased volatility in earnings, gaining competitive advantage amongst others as their prime driving forces
Question: How important are each of the following in driving improvements in your company’s risk management programs or initiatives?
2008 2010
Source: 2008 and 2010 Treasury and Risk ERM Survey
Take Away
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Survey Results - III
• Technology in 2010 has enabled more companies in their risk identification, analysis, quantification, reporting and monitoring than in 2008. But , if not designed, implemented and managed correctly, the technology used to measure risk will itself pose a major operational risk!!!
• Finally, ERM was said to have more room for improvement in 2008 and is definitely seen in positive light now despite a long recessionary period.
Question: To what extent is technology used to enable the following elements of the risk management process?
2008 2010
Take-away:
Source: 2008 and 2010 Treasury and Risk ERM Survey
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After the crisis, what does the Industry believe about ERM?
Improved Cash flows,Reduced hedging or insurance costsReduced Capital costsImproved Investments or avoided lossesImproved reputation
Data Acquisition CostsInfrastructure CostsHuman Resources CostsOverall ERM Implementation costs
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Extracts from an independent survey from 2010
For a successful ERM Program, the following attributes were recognized to be critical:
• Board level commitment to ERM is critical for successful decision making and for driving value.
• A dedicative executive in a senior level position who drives and facilitates the ERM process
• An ERM culture that encourages full engagement and accountability at all levels of the organization
• Engagement of all stakeholders in risk management strategy development and policy setting
• Transparency of risk communication
• Integration of financial and operational risk information into decision making
• Use of sophisticated quantification methods to understand risk
• Identification of new and emerging risk from internal data as well as from information from external providers
• A move from risk avoidance and mitigation to leveraging risk and risk management options to extract value
Source: Global Enterprise Risk Management Survey, 2010, AON Analytics
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What do experts say?
• “Objective of implementing an ERM is to have a unified platform that operates in a standard
framework for risk management that covers all leading financial risks such as market, credit, liquidity
and operational risk”
• “In the past, banks have done the business and then went about measuring risk; now, it is necessary
to measure risk and use the knowledge to do the business.”
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Sources and users of Data in an FI
External ReportingInternal Reporting
Budgeting & Control
Customer & Product
Profitability Basel II/IIIInvestor Relations
Economic Capital
Business Calculators
FTPBudget & Forecast
Ops RiskCreditALM Market
Integrated Risk Engines
FED SEC OTS FDICT&FBOAR
DALCO CRMPCUsers
Sources
DATA
Guarantor
MarketCollatera
lContractREF
Customer
External Website
sGL
In-House
Product Rating
DATA
TO
IN
FO
RM
ATIO
N
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Typical Pain Points – A Business User’s perspective
The data I get is not the latest Latency
Issue
I cannot substantiate
how a number is generated
Substantiation Issue
The data I have is not
self-sufficient
Access Issue
I have no idea who is consuming what data
Uncontrolled Proliferation
Issue
I get different
answers for the same question
Inconsistent Data
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Primary Attributes of Quality Data
Accurate
Fit For UseDATA
Timely
Complete
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Data Quality Process
Profile
Cleanse
IntegrateDeliver
Monitor & Report
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Data management approach for effective Risk management
Ownership of data problems
Combination of top- down and
bottom-up approach
Data availability in various
source systems - risk, finance
Defining Target State
Establish data governance framework
Pillar II, Basel III, liquidity risk and
stress testing
Data classification
issues
Identifying periodicity,
latency issues and data flow
Data standards/ definition/Metadata
Impact of non-availability of
data
Identifying appropriate data sources/owners
of data
Design of data architecture
Policies, processes and
standards
Data quality assessment
Data Gaps, reconciliation
Roadmap for implementation
Organization Structure
Data Requirement
s
Sourcing of Data
Pre-cursor to Implementatio
n
Methodology
Data Governan
ce
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Data Quality Solution
A combination of Business Processes/Methodology and Data Quality Tools
Multiple Customer
Information Stores
• Identify data sources • Identify data source
champions• Profile data sources• Identify Golden Source for
each information domain• Pick relevant attributes from
other available sources• Incorporate Data Quality
checks• Set up feedback systems for
review of rejected data
Multiple GL Systems
Collateral /Limit Management
Systems
Data Warehous
e
Risk & Reporting Engines
• Reconciliation Process
• Identify mismatches
• Feedback • Resolve
Transaction Systems
Multiple Product Information Stores
Multiple Issue Rating Systems
17© Hexaware Technologies. All rights reserved. www.hexaware.com
© 2009 Hexaware Technologies Limited. All rights reserved. For internal circulation only. Neither this publication nor any part of it may be reproduced, stored in a retrieval system or transmitted in any form or in any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of Hexaware Technologies Limited. Published by Corporate Marketing & Communications
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