Recent research conducted by the Economist Intelligence Unit on behalf of SAS illustrates both the scope of the proposed reforms and the scale of the challenge ahead in risk management. In March 2009, the Economist Intelligence Unit conducted a global survey of 334 senior financial services professionals, of whom 50 percent were C-level and all have responsibility for risk. The unit than carried out a programme of interviews with high-profile commentators including Alan Greenspan, former chairman of the Federal Reserve; Nassim Taleb, author of The Black Swan; and Peter Bernstein, founder of Peter L Bernstein Inc.
The new report, After the Storm: A new era for risk management in financial services, written by Phil Davis brings these two strands of research together.
When we started discussing the research process in January our main concern was to pluck subjects that would stay in the public domain from the middle of 2009 and beyond. As the popular media became risk experts overnight, this was going to be a challenge. We wanted especially to have Phil Davis interview key players in the financial market who would offer insight on the future direction of risk management, no mean feat in a very uncertain and fluid economic situation.
So at the start, the challenge was not so much operating with a crystal ball on the financial world, rather wondering whether the ball would be in play at all. In the end the survey gave us an excellent understanding of where financial services companies see the present situation and a view of the future.
With the global political focus remaining on re-establishing the creditability and integrity of financial services (at a local and global level), one of the most intriguing elements to come out of the survey was the lack of confidence the financial services community had in those (rating and regulatory) agencies tasked with benchmarking and challenging their approach to risk management. But many risk analysts did not have the culture to challenge their firms' management to act on any blind spots in their approach to risk management that the risk team had identified. Alan Greenspan did make the point when interviewed by Phil:
The important lesson is that bank regulators cannot fully or accurately forecast whether, for example, sub-prime mortgages will turn toxic, or a particular tranche of a collateralized debt obligation will default, or even if the financial system will seize up. A large fraction of such difficult forecasts will invariably be proved wrong.
So we expect to see, in the near future, the recommendations that will take us in to a new era of global financial services, certainly around areas of (systemic, liquidity, stress testing, firm wide, Credit, Market and Operational) risk and capital management, regulated by the various governments and their agencies. Business confidence will be restored, slowly, but will lessons be learned and practical, appropriate measures implemented, at country, regional and global level? It will be important for vendors such as SAS, through its Business Analytics Framework, to help the banks and their regulators to build into their infrastructure improved levels of transparency that have been missing to date. Although even here, those tasked with bringing the new risk monitoring processes forward will have the difficult job to avoid creating unintentional side effects, where transparency becomes a regulatory log jam of high cost, low value reporting of lots of data but no key information or forecast, rather than an aid to make the global financial machine run more smoothly and as safe as is “practical.”
Any new or enhanced risk processes, that support an holistic view of risk measurement and decision making for a wide range of players (banks, rating agencies, regulator, governments, Joe public), will need to be based on a integrated risk management approach (and yes the ubiquitous need for available and quality data).
As the Economist Intelligence Unit Briefing paper concludes:
- Change is not merely desirable now, it is critical to firms’ survival and their ability to compete in a marketplace that will inevitably become more rules-based and hence more complicated.
- The best firms with the brightest people embrace change. They will adapt and prosper in the new environment.
- Successful firms know that the answer to the big question of the past several months is not to take risk off the table.
- Without taking clever, calculated, controlled risks, no firm can be successful. Risk, in the final analysis, is not a function within a firm, it is the firm.
It will definitely be interesting to compare the views of the financial services community again next year and see how we have progressed. Let’s hope we are well beyond the green shoots conversation and the blame game.