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Risk management: It's not just for Finance anymore

March 7, 2007

Faced with increased credit, market, and operational risk as well as a number of new and pending regulations, financial institutions worldwide are under the gun to improve their control, mitigation, and management practices.

In response, the McKinsey Quarterly recommends an active, integrated approach for "all senior managers, including those who oversee compliance, audit, risk, investor relations, regulatory management, communications, and – above all – business and operations."¹

Here, John Blackmore, Manager of Communications at Cognos, an IBM company, speaks with Laurence Trigwell, Senior Director of Financial Services Marketing at Cognos, and Bruce Tyler, Associate Partner of IBM Global Business Services, about the Cognos-IBM Risk Management Cockpit.

The big three: Risk, growth, and sustainability

JB: Laurence, what are the big issues facing financial services organizations?

LT: "We're seeing three top issues, which seem to be impacting all financial services (FS) firms worldwide. The first of these is the trio of governance, risk, and compliance. FS firms are having to respond to an emerging set of regulatory requirements. These firms are typically international, so that's an added level of complication.

The second issue is profitable growth. So stakeholders are looking to drive an agenda to make sure that FS operations are selling the right products to the right customers through the right channels and third parties and in the right countries.

The third is making sure the firm is doing this in an operationally efficient and sustainable way. Specifically, making efficient use of capital and resources. These three components are tightly interlinked and have become ever more so in recent years."

The democratization of risk information

LT: "One of the key aspects of the new risk agenda is the increased need for functional alignment – where the risk team, the finance team, and the capital management teams work together. We're also seeing the incorporation of lines of business and IT that need to be linked into the finance, risk, and capital teams.

That alignment demands an enterprise view, in which groups across the business have a consistent, single view of risk. With that risk insight in the hands of the right people, the enterprise is now able to devolve risk-informed decisions to the appropriate level.

That's very important. It's no longer the purview of the central risk team or the capital team or finance team. Now, we're seeing the democratization of risk information. That means there is a broader group of people involved in the risk management process."

A single enterprise view

JB: So what would an enterprise solution for that look like?

LT: "We've encapsulated that single enterprise view into the Cognos-IBM Risk Management Cockpit. It aggregates data to provide risk reports, dashboards, event management, scorecards, and risk analysis capability in a single environment.

It means that – subject to roles, divisional requirements, functions, information needs, and security – people get access to the right information in the right form. And they can be expected to make the right risk-based decisions on that information."

JB: With this Risk Cockpit in front of me, what do I see? Can you describe it?

LT: "Imagine a first screen providing you with a summarized view of risk as it pertains to your role or business unit. It would include multiple risk classes – credit, market, and operational. It would include dials, gauges, and graphs of those risk metrics.

The Risk Cockpit provides summarized and detailed views.

You would also see a news feed of risk-based events with new reports available for you to look at and drill through. It would include a series of drill-through options across the risk class, allowing you to investigate to the appropriate level of detail. So you could get down to, say, a particular transaction for a particular client or a risk concentration.

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Again, all of that is supported in a single environment. Before, you would have seen multiple technologies requiring 'stitching together' to provide consistency. That creates two issues.

The first is the manual overhead of maintaining that stitching. The second is that business users, who may not be familiar with the data structures underneath, would need to be protected from making the wrong assumptions about how that data was created, when it was collected, and how it may be different.

It's very important to have a single presentation layer and a single metadata layer underneath that. This is what Cognos is able to bring to the table in a unique way."

Built on industry data models

JB: Bruce, IBM played a pivotal role in helping Cognos create the data model for the Risk Cockpit. What expertise and experience did IBM draw on to do this?

The data model draws on years of IBM experience. (Click to enlarge)

BT: "Within IBM we have various industry models. In particular for the Risk Cockpit, we used our banking data warehouse model, which is built off of hundreds of man-years of experience working with banks. It has a process layer on top of it and drives down to the underlying data model. Within this model, there are specific business solution and application solution templates. We used the Basel solution template as an initiator to help determine what the core metrics would be for our clients."

JB: Can you give us an example of something that might be in that data model?

BT: "You can go across the different types of solution areas, whether it's around probability default or exposure default. And it goes down through these layers to the data elements they are derived from and the calculations that are involved.

So if we were looking at customer analytics, we could cross-reference to see what information has already been pre-derived at the element level to support Basel.

From there, we would be able to see how to derive more customer insight. The idea is to go from a regulatory Basel solution and extend that over and beyond to improve the value of the investment that organizations have made."

The path to better performance

JB: Managing risk is critical but it's only part of the picture. How do you see financial institutions moving from risk management and down a larger performance management path?

BT: "What we've done within the Risk Cockpit is show the art of the possible. Look at Basel for instance – the type of information that's required to support it around customers and financial measurement, as well as the data management practices and policies needed. It can be a tremendous asset if you continue to build on it.

So you can start to do more with your customer insights to improve response rates and provide additional cross-sell, up-sell opportunities.

You can do more of the advanced type of analytics, and really embed that into the overall decision-making process that touches on the customer."

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Sources

¹ Cindy Levy, Harmid Samandari, Antonio Simoes. Better operational-risk management for banks. The McKinsey Quarterly. August 2006.