During the last 18 months, I have had the pleasure of attending numerous conferences, forums, events and webinars focused on Risk and Regulation. Although often considered as not the most ‘glamorous’ topic, I have noticed many significant changes already taking place, including increased interest and investment in new technology.
As a result, I have decided to summarise some of the key points that come up repeatedly when technology and risk are discussed together:
- How technology can add value? Most banks, insurers, and financial institutions still use Excel for model creation and validation as well as risk reporting. Most of the models are not well developed and need separate platforms to complete the data picture. Companies that want to be ahead of the curve invest, or express the desire to invest, in third party platforms that have the potential of bringing them to the forefront of technology and user experience (UX). Such technology enables industry leaders to steer the business rather than just navigate the numbers.
- Automated Reporting. Some of the companies have partnered with external providers and implemented advanced technological solutions to automate data gathering and data consolidation. As a result, they do not need static spreadsheets anymore. However, such automation often occurs only in one department / business line and does not extend to the larger group. Consequently, data gathering and consolidation on a group level poses similar problems as before, stemming from “all kind of spreadsheets” scattered across the bank/company.
- Data Issues. Many institutions express the difficulty in dealing with data, especially if the bank/company has international/global operations. Data challenges often become insurmountable. Standardizing data coming from multiple sources and legacy systems poses a big challenge, as does back testing and modelling the data. Banks would strongly benefit from the platform that allows running multiple what-if scenarios and stress tests. Integrating ad-hoc reporting would also add substantial long-term benefit to bank operations and risk management. Getting the data right is the first step.
- Data semantics and RDA (Risk Data Aggregation). Almost all G-SIBs (Global Systemically Important Banks) allude to the problems with RDA. Classical data warehouses led to data duplication. Even one risk area, for example Credit Risk, could have as much as 120 data sources. RDA projects can take up to 3-5 years. At Luxoft, we have observed two different models. First, firm wide financial data warehouses where data lake is created by financial department and include all data. Second approach is a smaller scale data store with detailed data definition or ontology approach, which works well in one department, for example a bank’s equity department. Building data mapping frameworks, which include data quality measures and scores, proves to be the right long-term sustainable approach.
- Bringing visibility and transparency. Some Big Data and Visualization tools are capable of bringing increased visibility and transparency to existing, scattered, data. By aggregating data from multiple sources and legacy systems, one can achieve a coherent, user-friendly, and consolidated view of bank exposures. Leveraging Advanced Data Visualization (ADV) tools can bring further transparency, flexibility and ease of use in navigating from global risk exposure to details. Grouping data has also been raised as an important topic, e.g. aggregating and grouping data by sources (internal, 3d party, regulatory, public etc.), risk types, counter-party and the like.
- What is available on the market? BFSI companies are genuinely interested in what solutions are available on the market to address their common challenges: data quality, automation, consolidation, aggregation, and reporting. Names such as Tableau and QlikView often come up when discussing Business Intelligence (BI) tools. Luxoft has developed its own solution – Luxoft Horizon – to address RDA and RR challenges, in line with BCBS239 principles. More information can be found on www.luxofthorizon.com
- Regulatory Push. Regulators across the globe have been pushing for more data transparency, accuracy, and timeliness. As a result, Financial Services industry has moved from risk averse, static and out-dated reports, towards more automated systems. 20 people working on a 7-page PDF report or a 14-slide Power Point presentation is largely the thing of the past. The industry is also becoming less risk and innovation averse in response to regulatory requirements. During the last 2-3 years, banks have become more willing to put data in the cloud and to outsource their operations and reporting. Although some banks still have constraints and out-dated technology, the landscape is changing for good. To be sure, it is still expected from each local regulator to provide innovative approach as well as clear guidelines with regards to data collection, exchange, and storage.
- The Future: moving from static to dynamic reporting. BFSI industry is catching up and starting to comprehend the importance of end user tools in enhancing customer experience. The industry is moving away from static, analogue reporting in Excel and Access, towards dynamic data discovery tools allowing data aggregation from different sources and reporting in (near) Real Time. Flexibility, agility, and ability to customise reporting to bank culture and behaviour are becoming critical differentiators. Ultimately, RDA and RR are not just ‘tick-the-box-exercise”, but rather a foundation for a permanent change of cultural and operational environment in the risk management space.