Looking back at 2011, what will be the abiding memory for risk management? Will it be the struggles of the Eurozone countries to restructure major debt? The stretched banking system across much of the globe operating in fear of contagion from the sovereign debt in Europe? Governments and regulators talking tough on plans to realign the banking system to remove risk from systemic allies or splitting the so-called casino element of banking from the retail, Joe-public element?
An interesting side note to the last point: One of the early failures of the financial crisis was a UK retail bank that did not operate an investment banking arm; it did not have access to its own investment banking business unit dealing in complex derivatives. What brought it crashing to earth was its unfettered drive to capture mortgage business and a short-term funding model to drive this growth via exposure to wholesale markets.
The interconnectivity and complexity of the modern global financial system and the ability of people with supporting qualitative models to understand what it all means has been under the microscope well before 2011, and yet there remains a lack of clarity around what real changes are needed to bring discipline and order to this seemingly chaotic situation.
What is common throughout the financial and regulatory discussion is the lack of reliable data. Recent attempts to establish forward-looking stress test views by the European Banking Authority have been criticised as much about what was left out as to what was said about banks’ ability to withstand further shocks.
In the end, there is a need to bring back trust and confidence in the financial sector and respect for those who work within it, as ultimately, a working financial sector provides the funding our economies need. And, a respected risk management function is an important part of the business decision-making process. This was clearly articulated in the SAS EIU 2011 Enterprise Risk Management survey where risk managers highlighted the relationship between the business and the risk department as an area that needed improvement.
Prior to and during 2011, many firms had already started to reconsider what risk and business information impacted their operational and strategic decisions and their ability to develop as a surviving, profitable enterprise. These firms looked to marry the business’s needs to a risk culture that uses risk models and a data architecture to support a risk management vision as part of the business process, realising that they must make their risk models and processes relevant and understandable to the activities of the business.
Because of the many walls that appear in large financial institutions, this type of approach may be the preserve of more adaptable banks, such as Bank Leumi in Israel and Danske Bank in Denmark where the relationship between the business and risk department has changed to improve cooperation.
Improvement in our immediate and longer-term economic outlook will need cooperation between financial services firms, governments and their regulatory agencies, and individual stakeholders. This will all need to be underpinned by good old, reliable trustworthy data; the key to rebuilding, and hopefully kick starting, a battered financial sector in 2012.
For a kick start in the work your firm is doing on its data in 2012, download this white paper about the role the board should play in ensuring effective risk management through sound data decisions and investments. Download Data as a Board-Level Issue.