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Transcript of Risk Management Information System Nurhastuty K. Wardhani & Shaista Arshad Prof. Dato’ Dr....
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Risk Management Information System Risk Management Information System
Nurhastuty K. Wardhani &
Shaista Arshad
Prof. Dato’ Dr. Kamaruddin Sharif
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Computerized systems that assist in consolidating information and provide reporting capabilities to enable you to monitor and control your overall cost of risk.
ISO 31000 – The effect of uncertain objectives, whether positive or negative.
Risk Management Information System
Risk Management
INTRODUCTIONINTRODUCTION
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• Management of risk data and information vital to success of RM department.
• RMIS is used to support expert advice and cost-effective information management solutions.
• Involves key processes such as:• Risk identification and assessment• Risk control• Risk financing
INTRODUCTIONINTRODUCTION
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Index of Leading RMIS Companies
• American Technical Services• Aon eSolutions• Certificate Management Solutions• Envision Technology Solutions LLC• Mountain View Software Corp.• Origami Risk • Riskonnect
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FUNCTIONS OF RMISFUNCTIONS OF RMIS
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• The business need that drive financial firms to implement risk management functions are:
ROLE OF RMISROLE OF RMIS
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• The RMIS should provide managers with the data needed to meet the business need.
• Managers require four things from their RMIS:
ROLE OF RMISROLE OF RMIS
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• Problem of designing RMIS : Problem of Aggregation
Data from each of a firm’s trading locations worldwide must be aggregated to calculate Value at Risk or to perform a scenario analysis on the firm’s worldwide
portfolio.
• Different methodologies require different information, thus imposing different requirements on the RMIS.
INFORMATION SYSTEMS REQUIREMENT
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RISK MANAGEMENT METHODOLOGIES
• Value at Risk : Delta Normal and full revaluation Monte Carlo. Centralized vs. Decentralized Methodology
• When selecting a methodology some problems a firm setting a RMIS may face are :
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• VaR: Widely used risk measure of the risk of loss on a specific portfolio of financial assets.
• It measures risk as mark-to-market loss on a fixed portfolio over a fixed time horizon.
• Each methodology combines an assumption on the future distribution of market risk factors and current data on portfolio positions.
• There is often a trade off between accuracy and computational demands when calculating VaR.
• Two VaR methodologies: Delta-Normal and Full Revaluation Monte Carlo.
VALUE AT RISKVALUE AT RISK
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• Delta-Normal methodology stipulates that:
• Future Distribution of changes in market is assumed to be multivariate normal
• Delta is the change in the position’s for one-unit change in market risk factor
• Distribution of change in portfolio value is linear
• The delta-normal method requires the RMIS to know the deltas of each trading unit’s portfolio
• This requires access to a large amount of data ( CF of each instrument in the portfolio)
DELTA-NORMALDELTA-NORMAL
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FULL REVALUATION MONTE CARLOFULL REVALUATION MONTE CARLO
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• When choosing between the two, the firm will trade off the accuracy of its VaR estimates with the computational burden required to compute its estimates.
SELECTIONSELECTION
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• Cannot predict where an firm will choose to be on the trade off curve. • Technical progress will cause the curve to shift out making the
tradeoff more favorable.
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• RMIS is more important in Islamic banks as the impact of PLS methods on depositors and the need for such investment is at the core of IB.
• An information system will help in reducing the possibility of asymmetric information, adverse selection and moral hazard.
• Advantage of such a system:• Help depositors with diversification and fund allocation questions
• Disclosure provides information on the main risk factors
• Good governance and internal control : reduce mismanagement
RMIS & ISLAMIC BANKSRMIS & ISLAMIC BANKS
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• Verasis represents a new generation of software systems and was developed by Veratec Limited, a software company operating exclusively in the banking and finance sector.
• Veratec recognized that the proactive measurement and management of multiple risk and regulatory disciplines did not necessitate the implementation of multiple risk and regulatory requirements; but to consolidate these requirements into a single integrated application.
CASE STUDY - VERASISCASE STUDY - VERASIS
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The Challenge
• Changing Markets and Trading Systems• Regulatory Environment• Risk Methodology• Old Technology
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The Solutions
• Leverage modern technology to provide clients with the ability to collect, collate, calculate and distribute the information from multiple trade sources across a range of Risk disciplines including:
– Historical Simulation Value at Risk– Market data risk (Interest rate, FX Rates, Volatility, Price)– Credit Risk– Liquidity Risk– Counterparty Risk– Asset & Liability management– Hedge effectiveness
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• Consolidate multiple Risk, Regulatory and Management disciplines into a single integrated application and consequently deliver:
- Cost effectiveness by reducing head count and system requirements (single valuation methodology, single data warehouse, single application environment, single set of interfaces)
- Consistency by ensuring that the same market data, methodologies and math libraries are used for valuation and processing within all functional business components
• Clarity by combining a configurable multi-format reporting engine with standard multi-level drill down architecture, allowing users to isolate and communicate results and issues quickly and effectively. Verasis Risk delivers reporting that is flexible, functional, and integrated
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Verasis Risk A Risk and Regulatory Management System for Treasury
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Anglo Irish Bank
• Anglo Irish Banking Corporation (AIBC) is based in Dublin and has offices in Austria, Ireland, the Isle of Man, Switzerland, the UK, and the USA.
• AIBC has enjoyed a sustained market-leading performance, which has resulted in Total Assets surging from €15.8 billion (30 Sep 2001) to €73.3 billion (30 Sep 2006).
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Verasis Risk at AIBCValue at Risk Hedge effectiveness (IAS39) compliance Interest rate riskAsset and Liability management Mark to Market
• This provides a fast and flexible Historical Simulation/ Monte Carlo-based VaR solution.
• Combine retail/corporate assets and liabilities with the financial instruments that fund and hedge them
• Analyze the Market Valuations and Interest Rate Risk in the Banking Book (IRRBB) using standard and non-standard yield curve rate shocks
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• RMIS are designed to overcome the problem of aggregating data
across diverse trading units.
• The design of an information system depends on the risk
measurement methodology that a firm chooses.
• Tradeoff between the accuracy of the resulting measures of risk
and the burden of computing them.
CONCLUSIONCONCLUSION