Risk Data Silos Still Cause Issues, Survey Finds

Risk departments are becoming bigger on both the buy- and sell-sides. That much is inarguable, and although they were once the black sheep of the budgetary program, that too is beginning to change as their function within investment firms becomes more centralized at all levels. A recent survey of ten tier one and two multinational banks across Europe by IDC Financial Insights, consolidated into a paper produced with Sybase, though, has found that although risk is increasing in importance, problems remain on a technological level with increasing its efficiency.

"One of the things that was brought out [of the whitepaper - Living Up To Expectations: Risk Management Battles to 'Earn It's Spurs' In Driving Captial Optimisation] is that a lot of organizations feel that while they have, within line-of-business or within function-level, a good or reasonable capability to analyze data, they don't necessarily make the best use of that risk data or analytics at the Enterprise level," says Stuart Grant, EMEA business development manager at Sybase. "It's certainly one of the challenges that we're seeing on a day-to-day basis; organizations are struggling to be able to take the granular-level information that's being generated at branch or desk level, and making that available to a head of business or group environment."

Up and Across
With risk officers now sitting at the C-level and in board rooms, however, access to granular data is becoming ever-more important in the modern financial services landscape. Regulatory requirements have been a prominent driver, of course, but the events of the financial crisis and frequent firm collapses have also demonstrated the importance of being able to see holistically across business lines.

"There's a legacy of the last 10 to 20 years, which has caused organizations to aggregate information up, and do that in a once-per-day process, by pushing up summary information," explains Grant. "The report finds out what chief risk officers (CROs) are starting to establish as new processes and new controls within their organizations, this ability to navigate from a group-level position to more granular information. They want to do it, but don't necessarily understand the technology challenges that are preventing them from getting to that."

Moving On
Part of the technology challenge, particularly on the part of major sell-side institutions, comes from the way in which these companies have competed with one another over the past few decades. It's not an unfamiliar argument to anyone who follows the financial services IT sector with any regularity.

"The way they've maintained competitive advantage over their peers in the past has been to develop a lot of this technology in-house," says Grant. "This is where the problem resides. The business will come along and say that they want to see across that line, or geography, at a very granular level, but you have lots of custom development that's been undertaken within the organization which doesn't talk to other areas. And so, firms are faced with having to unwind that period of custom development to achieve the next step forward. This is where a lot of the issue arises from, the business asks for something and they'll be told by technology that it requires too high a budget, or will take too long to implement, purely because they have this mish-mash of custom development and they'll be looking to build on top of it rather than use standardized technology, which is available now."

The need to protect existing investment, of course, is a strong one. The whitepaper produced by Sybase and IDC concludes with the idea that although many risk managers believe that they're in a far better place, in terms of data management and analysis, than they were in the past few years, there are hindrances. Rip-and-replace tech projects are time-consuming and expensive to undertake, and consolidation is often a preferred approach, particularly when an organization may have 20 different risk management systems operating across divisions.

Forward Pressure
The more successful projects, Grant says, are those where risk is increasingly more integrated with the front-office staff. The trading floor is where investment has historically gone, and that mindset still exists, even if it is changing. If a CRO can demonstrate, effectively, a business case for a large-scale risk data project across an enterprise, and how it will deliver real benefit to the profit-making engines, then naturally they will enjoy more success.

"Everyone has a slightly different view on how to run their business and the value that risk has in improving their day-to-day processes," says Grant. "But, certainly, where risk has heavy involvement, and there's proactive engagement from the front office to the risk environment, that's where it becomes easier to justify the business case. You have a direct impact on the front office capabilities, then."

The Bottom Line

A potent cocktail of IT complexity arising from in-house developments and expensive replacement projects means that holistic data views across silos are not as simple as might be expected.
Although the technology exists to perform this task, CROs are still hindered by the need to produce immediate, short-term tactical business benefits when the real positives may be long-term in nature, in order to gain approval.
However, the increase in investment within risk departments, and their integration at the most senior levels of a business are encouraging signs. Risk is now a strategic partner, rather than a back-corner desk.