Bruno Stratmann
Understanding risks under which we operate has never been more important. After all, we are living in a transformative time. But how could the risk department change in order to meet the upcoming challenges effectively? Bruno Stratmann, Counterparty Credit Risk at Deutsche Bank, shares his vision.
Ever since the Lehman crisis, the need for banks to effectively control their risks has risen constantly. Moreover, some types of risks such as cybercrime and financial fraud have become much more important in the last decade. The combination of constantly increasing regulatory requirements and the emergence of new technologies, which are fundamentally changing the way financial institutions need to operate, have made it more and more difficult for the industry to manage risks in the old compartmentalised fashion.
This is where “risk as a service” comes into play as part of the business intelligence, a risk management solution located on a single platform covering the entire spectrum from advanced analytics to risk reporting for all types of risks.
Risk as a service can be used to track business processes, and not only automatically monitor known risk types, but also to help identify new types of risks. For example, at the moment, firms employ fraud detection systems which use static sets of rules. The single platform approach combined with state-of-the-art machine learning will allow intelligent fraud detection algorithms to learn in real time.
Another important use case of risk as a service is a new generation of reporting. There is an ever-growing need for more sophisticated and detailed reporting to be done for different purposes, often on an ad-hoc basis. Here, new data structures from the big data world would allow the recipients of the reports to drill down and look at the wealth of underlying data from various angles and at different levels of granularity. This further integrates risk with the other departments and broadens the business users’ consciousness of the risks they are operating under.
Furthermore, it will enable firms to perform new types of stress testing with much broader scenarios based on the actual risks undertaken by the business. This will provide more realistic and detailed results but at the same time allow for a more holistic view.
This integration will allow for a much broader application of the risk data in business processes. The ever-growing set of data will lead to a better understanding of historical trends and black swan events as well as allowing for better predictions. Let us take the risk adjusted return on capital as an example. The measure is known in the industry for quite a while, but with the right input, it could be used to generate predictions, which can in turn be used to control the business through allocation of resources and capital as well as risk appetite determination.
Over time, risk departments have developed highly sophisticated methods to perform traditional risk tasks. In order to add additional value to the business, the transformation sketched above seems inevitable.
"Certain features are essential to an effective FRR solution – a central data repository, strong data lineage and a modular design – but an assortment of other factors will determine the ideal architecture for any given firm. These include its mix of activities, the number and locations of the jurisdictions it operates in, and the relevant regulatory, legal and political environments.
Another critical aspect is the history of the business, and of its systems in particular, for it is those systems that new technology will have to be integrated into or replace. Perhaps the most vital factors are an entity’s organizational structure and corporate culture, and the extent to which they foster operational integration."
FinTech Futures
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