Risk management—especially intraday risk monitoring—is branching out of the middle office as firms try to keep up with volatile markets, cut costs and comply with new regulations. A new survey of 61 bank officials by MORS Software, based in Helsinki, Finland, found that most banks are prioritizing intraday liquidity risk controls even if they haven’t yet done anything to support those controls.
The survey finds that many firms have intraday monitoring for nostro and central bank balances, and for some liquidity risk figures—the key areas of concern for liquidity risk monitoring activities among respondents. But many of those surveyed say that they are not yet able to do a complete, intraday monitoring of liquidity risk.
Only one third of survey respondents report that they can monitor consolidated, bank-level risk figures on an intraday basis, which as MORS officials point out is the standard set by regulators. The respondents were from 26 countries including the US and the UK, and countries across Continental Europe, Asia and the Middle East. MORS conducted the survey between May 4 and July 15 of this year.
The problem lies in gathering the data they need for intraday risk reporting, according to the survey responses. Historically, much of the data resides in middle office, risk management systems. But to get a complete view, data has to be gathered from multiple sources beyond the middle office. “On average, banks collect liquidity risk monitoring data from three different systems,” according to the survey results.
In addition, intraday liquidity risk monitoring projects are a long way from the finish line for most banks, according to the survey. Only 13% of respondents have actually finalized their projects. The upside is that an increasing number of banks have determined that they need to move ahead with their intraday risk management projects.
The efficient use of liquidity and cost-cutting were seen by survey participants as the top benefits of intraday liquidity monitoring, say MORS officials. But there is a growing sense among the survey participants that they need to focus on regulatory compliance especially as the Basel III deadlines are looming.
As risk management reaches out across firms, the next logical step is for risk data to become a real-time flow that stretches across front-, middle- and back-office systems.
Real-time risk management makes sense for pre-trade processes, order management and portfolio management especially as markets have become so volatile. It also makes sense for the alphabet soup of analytics in place at many firms.
The roadblocks to true, real-time enterprise-wide risk management capabilities are a combination of IT and political issues.
The first stumbling block would be the silos and empires that are fixtures at many firms. Getting those groups to become more transparent is generally a major challenge for most firms. Breaking down these fortresses will likely lead to major battles, power shifts and bruised egos.
On the IT front, achieving consolidated, intraday risk monitoring is a little like re-inventing and them implementing a new nervous system on a human being.
To say the least, firms have their work cut out for them and it’s not clear that they will hit their marks in time for the regulators.
More importantly, what happens to a firm’s clients if the firm fails to implement complete intraday risk monitoring and controls? Will most clients find out after the fact when the losses have spun out of control?
How many firms are willing to take that risk?
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