Know Your Risk

Financial organisations face a paradoxical situation when it comes to risk – they need to minimise it, but they can’t grow without it. In today’s economic climate, it is more important than ever to identify, measure and minimise risk in order to reap its attendant rewards. Alexander Millington, head of risk management software at Formicary, explains: “Financial organisations thrive on taking risk, but understanding and giving clarity to that risk is more important than ever in a complex trading environment.”

However, banks face many challenges in accurately assessing the risks they face, and there is consensus among the experts that risk analysis methods have previously fallen short. “How you value the risk is obviously key to determining the size of the reward,” says Michael Bush, head of product management at Business Control Solutions. “But how do you value risk that only has a ‘potential’ to take place?”

“Margin pressure in core business has driven many organisations to seek greater return in the capital markets, fundamentally carrying a greater risk to their business,” says Nigel Lee, chief commercial officer at Financial Architects (FinArch). “A failure to correctly assess risk and risk-adjust business performance has exposed these organisations, their customers and their shareholders.”

“Financial organisations are still searching for the appropriate balance,” adds Chris Moxon, chief executive officer of Methodware. “The herd mentality prevalent in many large financial organisations, driven by pressure to maximise profits, has produced a bias to ‘reward’ in spite of the associated risks. Controlsapplied in recent years have not been effective, and some banks have focused more on controlling small fraud exposures than managing advanced credit instruments or systemic institutional issues. Clearly, this needs to change.”

That change is on the horizon, according to Adrian Maconick, director of Finsbury Solutions: “We are in the middle of the biggest banking crisis in my lifetime,” he says. “This will trigger a complete re-evaluation of risk management which will cover the regulators, the role of government, the role and status of risk management in the organisation, the measurement of risk and the systems used to provide risk management information.”

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