An educated use of risk models in the financial services sector


I had the pleasure to be the host of the Risk and Finance Insight Session on the second day of The Premier Business Leadership Series, where we discussed the subject of enterprise risk management and financial stewardship.

With global, political and financial upheaval becoming the norm (and during the conference the situation in Greece appeared to be getting more explosive by the minute), risk management and the ability to accurately gauge the effect of market volatility is vital to the health of any modern business but none more so that financial services institutions.

Starting the session, Edwin Van der Ouderaa, Executive Director, Accenture Analytics for Financial Services discussed his views on combining marketing & risk in new ways. Basing his slides on data scoured from 5000 financial institutions across the globe, Edwin noted that there was still plenty of profit to be made, irrespective of where banks operate or the cost of capital to them locally.

In Edwin's view, the ability to be able to accurately price the cost of capital for the products held by each customer would allow banks to manage their margins so well that they could dramatically increase Return on Equity (ROE) by laser-focusing on optimal customer relationships. As he pointed out, "there is no such thing as a bad risk, just a badly priced one."

Then George Roffey, Operations Manager and Keith Chapman, Director, Regulatory Capital Development – Capital Reporting at Barclays Bank PLC spoke about Barclays' implementation of an enterprise-wide risk analysis and reporting system. Citing the project that originated several years ago to address Basel compliance, they candidly shared the high and lows of introducing such a complex system. But the benefits to the bank are clear: not only are the numbers they report accurate and timely; they are recognisable. Executives believe in their reports and the way they were generated. So, as the bank developed their robust 'single version of the truth', they were able to extend the reach of the analyses to a much wider audience.

The final panellist, Owen Sorour, Head of Credit Risk, Customer Value Management, Absa Retail Bank spoke for 15 minutes on his long experience of working in financial services in South Africa. He ruefully told how lenient lending in the period prior to the Global Financial Crisis (GFC) had caught many lenders unprepared when the economy dramatically slowed down and bad debt began to rise. Yet in Owen's view, more regulation does not make financial institutions more safe. Rather, the boards of the banks should do that to secure the future of their institutions.

Owen also pointed out that many executives during this period had become overly-reliant on analytical models they didn't fully understand, especially when faced with a fast-paced changes that moved too quickly for the lagging indicators to pick up. In essence, by the time the models had had a chance to factor in this new data, the slide had already begun. But Owen is not a critic of such models; far from it, he's a believer in the educated use of models by executives across board roles.

All three speakers then took questions from on a wide range of subjects but for me these stood out:

Edwin stated that patterns of ROE within regions have a measurable impact on the way risk is considered. There are some parts of the world where there is clearly a higher appetite for risk than others and George noted that it had been a factor in Barclay's risk architecture. They needed a global system, with some global standards, but that could still allow local flexibility.

Taking this further, the panel explored how major banks were now also having to pay attention to the 100s of millions of new customers from developing and growing economies that are now included in financial products and markets. Not only do these people and businesses often have no credit histories, they need to be introduced to the basic of even common financial services products.

Finally, in answer to my question about whether there will ever be a need for a Chief Analytical Officer, the panel all agreed that the functions of such a role would be necessary in the future, but that it should be a core competence shared by all board members.


About Author

Peter Dorrington

Director, Marketing Strategy (EMEA)

I am the Director of Marketing Strategy for the EMEA region at SAS Institute and have more than 25 years experience in IT and computing systems. My current role is focused on supporting SAS’ regional marketing operations in developing marketing strategies and programs aligned around the needs of SAS’ markets and customers.

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