Risk and Reward: Why Getting Your Risk Data into Shape Will Lead to Business Rewards
The 2007 Global Financial Crisis (GFC) was exacerbated by the failure of the banks and other key institutions to grasp the hidden balance-sheet risks brought about by exposure to new financial products. When the crisis hit, events moved so quickly that they lost even that tenuous grip on their risk exposure. This not only jeopardized the survival of individual financial institutions (FIs) but also created systemic risks that threatened to overwhelm the financial structure of the developed world.
One of the key causes of the crisis was a weakness in financial institutions’ IT and data architecture, which had prevented them from understanding the true nature of their exposure to adverse events. Bank systems were incapable of providing rapid access to comprehensive information covering the whole enterprise. And even when they could get it, the reliability of the data was questionable, undermining decisions based on the numbers.
The Basel Committee on Banking Supervision’s response to the crisis, embodied in the legislation known as BCBS 239, was a set of rules to strengthen risk-aggregation and risk-reporting practices at banks. There are two overarching principles. Firstly, that a financial institution’s data architecture and IT infrastructure should support risk-data-aggregation capabilities in normal times and times of crisis. Secondly, that risk-aggregation and reporting practices should have strong governance. But in practice, adhering to these principles fully is a big challenge for financial institutions. The Oracle and Center for Financial Professionals survey shows that significant work remains to be done even at the larger global systemically important banks (G‑SIBs). Inconsistent data resulting from siloed systems and poor data quality due to multiple sources are two of the barriers impeding FIs’ attaining true compliance with BCBS 239.
In our survey of Center for Financial Professionals members, we analyze the current state of financial institutions’ preparedness for regulatory requirements, and examine their data-management initiatives. Through our survey, we also aim to understand the key challenges affecting FIs with respect to regulatory reporting; the key factors governing success of the risk-management processes; and the importance of data governance.
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