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The Risk Market

The Risk Market

Interview between Ray O’Brien (MD of E1Works, a specialist risk management consultancy based in London and Frankfurt), Robert Tripp and Daniel Forsythe

Questions asked by the Howbankswork team are indicated in italics, followed by the response.


HowBanksWork believes that the joint requirements of Basel II and IAS 39 are a golden opportunity to rationalise the MI systems of a Bank. What is your opinion?

Absolutely right, although I would use the phrase “data infrastructure” rather than MI systems. The industry is beginning to realise that, despite all the fancy maths in risk management, the key is the data. To have good risk management systems you need a good data infrastructure (Data Warehouses, good ETL software, sound meta data driven rules, robust models), something most banks do not have. This is also being realised by the supply side of the industry which is why the big database companies like IBM and SAS Institute are becoming active in the Basel scene so much at the minute. Another way of looking at this is from the point of view of the boardroom.

  • First the Group Risk Officer says he needs new asset related systems.
  • Second, the CFO says he needs new asset related systems for IAS 39.
  • Third, the COO says he needs new MI systems for operational risk aspects of Basel 2.

Finally, the CIO’s response is “There must be a good way to deal with all this.”

HowBanksWork also believes that the operational requirements of Basel II will require completely new systems and processes. Is this true?

In general yes, although you have to be careful when looking at specific banks. Some are much more advanced than others. (This applies not only to Operational Risk but also Credit and Market Risk). It will be very interesting to see how the regulator deals with these differences as Bank Chief Executives are very worried about the reputational damage that could be done to a bank’s share price if it does not get Advanced status. The industry could get into a kind of “race” to be the first to get Basel Advanced status.

Which Suppliers, Consultancies and Software Houses will be key players in this emerging market?

If we agree that these requirements generate a significant data infrastructure programme then it seems there is currently a fight between the large database engine suppliers (IBM, Oracle, SAP, SAS, Terradata etc.) and niche risk analytic engine manufacturers (Algorithmics, Sunguard for example). In practice nobody has a full set of answers, whatever their presentations say, so sets of alliances are bound to emerge.

The other aspect will be the role of consultancies. The big five had a roller coaster with the introduction of market risk in the nineties. Their early work was felt to be very valuable but later their relationship with many Group Risk officers deteriorated as it was felt that they started to “boiler plate” solutions at high prices. Still, it is hard to imagine a big bank undertaking a major data infrastructure programme with important regulatory consequences without the board wanting some degree of endorsement and support from a big 5 consultancy.

Do you expect Banks to use outsourcing in Risk or Financial Reporting Processes?

NO. A lot of the point these changes is to generate confidence in the minds of regulators and auditors that the bank is on top of these subjects. I can’t imagine a CFO when faced with a regulator or auditor saying “I am sorry, I can’t explain that point, you will have to talk to my outsource partner.”

Are there any International Standards in this area that will help? Given we are talking Data Infrastructure, I guess we mean standard data or object models?

Sadly, not really. When I was working in a large international investment bank on the introduction of market risk there was an attempt to get a consortium of 12 banks to create some standards. It failed. We just ended up fighting. It is hard enough to get a model agreed in one large banking group, let alone between banks.

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