Do risk professionals wear Fitbits?
Banks and investment firms are narrowing the bands of risk, and bringing market and credit risk management closer to the front office, writes Alan Kelly, Global Head of Risk Product at Torstone Technology. He likens risk at firms today to the Fitbit, as its users know their health metrics in real-time.
New technology is changing the way we analyse risk – both as individuals and as an industry. For example, a Fitbit watch can help an elderly person monitor a health condition or support a younger person’s increasing fitness by counting how many steps they take and tracking their heart rate throughout each day; both would struggle to get that data any other way.
Commercially this can make a real difference. In the kitchen, professional chefs take the adage, ‘if you play with fire, you get burned’ very seriously. Temperature and timing affect the risks of wastage, food poisoning and injury, which carry a material cost to the business.
In 1970 it was reasonable to use a combination of the chef’s senses to supply a feedback loop of risk exposure and health and safety regulations to determine acceptable boundaries of heat – and therefore risk. In 2021, technology exists to support more sophisticated measurement and control of heat – or risk.
For capital markets firms, it is no different. They use technology to get more efficient, gaining detailed feedback. That would include monitoring ongoing exposure to a range of risk types, assessing new risk exposures pre-emptively and working out which trade and which counterparty makes capital sense for the organisation. Building a risk system that supports the three lines of defence – including regulatory objectives as well as internal checks – is fundamental to most operations.
The growing volume and complexity of regulation places a strain on these systems. As firms seek to buy or sell more complex products, risk must also be managed in more sophisticated ways. If legacy methods of measuring risk are maintained well beyond their lifespan, these operational challenges can lead to failures of risk management.
Like the Fitbit, a risk system in 2021 should be able to monitor a firm’s health in real time and provide an understanding of what constitutes ‘healthy’. The device also characterises the ‘client’ model of services today, with its apparent size and simplicity masking the power of the technology that sits behind it.
As banks and investment firms embrace the use of cloud-based data and adopt the ‘as-a-service’ model, they can likewise access specific functions when needed without having to carry more hardware.
SaaS allows platforms to be accessed by more than one user or client with data separated and secured, to enable scale without duplication. Power is delivered at the backend, with additional computational resources being added dynamically, and in some cases, automatically. This makes the deployment and development of services easy and relatively low cost.
However, where risk in health is typically avoided, finance – like cooking – needs a little heat to make it work. Keeping a fryer within one degree of the right temperature by using a CPU to control it allows a chef to create food that would be impossible with a fryer that might otherwise have a range of +/- 10 degrees.
Risk technology is equally part of the solution that capital markets firms offer. Keeping a capital buffer or collateral at exactly the right level – rather than padding it out – gives a bank more assets to use in order to generate returns, bringing front-office pre-trade analysis and risk management closer together. These feedback loops become part of the trading process.
The Real Risk
If a business maintains manual processes and box ticking for risk management rules when more sophisticated technology is available, they are weakened when compared with their peers.
Errors will occur increasing in frequency and size. The capacity to recover from errors will be more limited. The ability to learn from errors will be more limited. Compliance failures will lead to punishment by regulators.
As a result, the firm with less sophisticated or less transparent risk management systems will gradually lose customers, reputation and capital.
Service quality levels will be driven by firms that are capable, while incapable firms will struggle, adding greater pressure on their strained processes.
To embrace more sophisticated and transparent feedback loops, which reinforce business goals, financial firms need access to systems that enable them to self-moderate within their risk management functions, keeping compliant and giving them a competitive edge.
Alan Kelly is Global Head of Risk Product at Torstone Technology (https://www.torstonetechnology.com/)
Article originally published on: https://tabbforum.com/opinions/do-risk-professionals-wear-fitbits/
February 15, 2021