In my last post I discussed the tug of war over bonuses and the ways in which banks are attempting to reward risk in a responsible and sustainable way. I questioned whether bankers and the regulators had all the tools they needed to measure risk and so today I want to look more closely at innovations which are enabling bankers to measure risk more accurately than ever before.
Risks and rewards are two sides of the same coin. Businesses need to take calculated risks to deliver the next wave of innovations and hence capture the corresponding rewards.
The banking industry today faces the dilemma of managing risks across geographies, across product lines and across organizational boundaries. Banks have invested in a plethora of tools and analytical applications to measure risk and have a single view of the truth.
The Right Tools for Managing Risk
In the United States, a proposal published on Jan 17th, 2012 by the Federal Deposit Insurance Corporation (FDIC), would require the 23 FDIC-regulated banks that meet the asset threshold of over USD 10 billion in assets to conduct their own tests based on three economic scenarios developed by the agency, using data as of September 30th of any year.
The proposal implements a requirement of the Dodd-Frank financial overhaul passed in 2010. In addition, the largest financial firms, those with more than $50 billion in assets, are subject to an additional level of stress-testing by the Federal Reserve.
The pressure continues to build on banks to be able to respond to a wave of regulations being implemented to reduce risk taking across the banking system. In response, banks have continue to evolve their risk management practices to lower risk and better respond to the needs of their regulators. With ever growing volumes of data across business units covering a vast range of products and services, banking executives are at times challenged by the tools available to them to respond to the new demands in a timely and effective manner.
SAP over the past year has delivered innovations in memory computing to deliver real time analytics and applications that has secured the attention and sometimes grudging admiration from technologists working at major banks and insurers worldwide. SAP HANA enables organizations to analyze business operations based on large volume and variety of detailed data in real-time, without any delays. Deutsche Bank has run a prototype with an early version of the in-memory technology.
“In particular,” Hermann-Josef Lamberti, Group COO and head of group technology and operations, Deutsche Bank said, “we were able to speed up the data-analysis process to detect cross-selling opportunities in our customer database from previously 45 minutes to 5 seconds. In-memory is a powerful new dimension of applied compute power.” In North America, one of the largest commercial banks, recently invested in a prototype with SAP HANA to deliver shorter response time by factor of hundreds when compiling dashboards of key performance indicators for the office of the CFO.
The Way Forward
At a recent SAP World Tour Financial Services conference in New York City, I had the opportunity to speak to an industry analyst from a leading US analyst firm. He recounted an anecdote from his days as a banker several years ago that stuck with me. The CEO of the bank was probing the risk reports. He was questioning if the risk was adequately captured in the bank risk models in light of the newly introduced lending products that were being rolled out through branches nationwide.
The CEO felt that the adjustment in capital reserves did not reflect the recently acquired risk from the lending products. The probing by the CEO had started with his executive administrator telling the CEO that “something did not smell right”! Continued probing by the CEO revealed that the existing models had not been appropriately revised to reflect the added risk from the newly introduced lending products.
In today’s markets, it is especially relevant to ask such “probing” questions and play out “what-if” scenarios when measuring and monitoring risks. SAP has delivered compelling in-memory computing innovations with SAP HANA that bankers can benefit from tremendously as they build the roadmap to a more sustainable future in order to best meet the needs of their customers, employees, shareholders and regulators.