The recent turmoil in the banking world has left the financial industry shaken, and reaffirmed the importance of robust risk management practices, procedures, and technology to firms’ safety and soundness. The disruption also promises to bring about increased regulatory scrutiny of banks’ risk management technologies and heightened supervision of their risk modeling, data, and stress testing capabilities. Going forward, banks will be incentivized to place tighter controls on the software, spreadsheets, and end-user computing (EUC) applications that make up their risk management systems to avoid the perils that have toppled major financial institutions.
Banks’ risk management systems vary depending on their size, complexity, and capabilities. However, most are underpinned by a dense network of financial models, software tools, and statistical packages. Banks of all sizes also make extensive use of spreadsheets or spreadsheet-like applications to handle certain risk management duties and perform ad hoc tasks.
However, these spreadsheets lack the enterprise-grade controls, auditability, and governance that can help banks avoid risk management snafus. Inadequate oversight of risk management systems can be costly. Analysis by Chartis, a research organization, estimates the Value at Risk (VaR) for the fifty largest financial institutions attributable to uncontrolled financial models and EUCs at $12.1 billion.
Patchwork risk management systems are increasingly untenable in today’s hyper risk-sensitive market context. In light of the current crisis, firms will be faced with increasing pressure to level-up their existing software and tooling. Indeed, it’s likely that current events will trigger a widespread review of legacy bank risk management software, processes and controls. At the same time, managers will want to control costs in the midst of a darkening macroeconomic environment.
While multiple factors contributed to the current banking tumult, what’s certain is that once the immediate crisis passes, financial regulators will want to keep a close eye on how firms identify, manage, and mitigate the kinds of risks that fomented the crisis. Since process and control issues often play a role in bank failures, it’s likely that authorities will focus their attention on bank risk controls and understanding the protocols and safeguards that govern asset and liability management practices. Increased scrutiny will also fall on stress testing capabilities and practices since stress tests are supposed to minimize the likelihood of real-world bank failures.
Internal stakeholders are also likely to ramp up their monitoring of banks’ risks management data controls, quality, accuracy, and usage. Company leaders will be compelled to improve data governance and reporting efforts and build out their firms’ capabilities in anticipation of the likely introduction of new regulatory requirements around model risk, validation, and stress testing.
However, plenty of barriers stand in the way of banks wanting to undertake this kind of risk management transformation. For one, a war for talent in both technology and risk domain expertise will frustrate efforts to build out risk functions with appropriately skilled employees. For another, implementing enterprise-grade governance and control systems for risk management software is time- and resource-intensive, with programs often taking months if not years to complete. In addition, the allure of EUC systems and spreadsheet applications will remain strong in a world where these remain the fastest and easiest ways to action routine testing, modeling, and reporting tasks.
When it comes to overcoming these barriers, many banks may not have the luxury of time. In the current environment, shareholders will demand prompt reassurance that banks are building risk management systems suitable for the post-crisis landscape – as will regulators.
This time pressure will put a premium on solutions that can augment banks’ current risk management systems without requiring a wholesale overhaul. This means software tools that overlay firms’ existing mesh of applications, EUCs, and models with the controls and automation required to navigate the changed market environment.
In addition, firms will be incentivized to rapidly scale their risk management capabilities to accommodate the sweeping changes expected in the wake of the current crisis. Regional banks without the massive software budgets of Wall Street’s giants may find themselves subject to similarly strict supervision as regulators reconsider which institutions pose a systemic risk to the financial system. This will put pressure on affected firms to structure appropriate risk management and regulatory reporting processes around liquidity and capital adequacy, stress testing, and resolution planning, among other things.
However, these firms will still want to have systems that are nimble enough to adjust to changing conditions amidst the current banking industry shake-out. This means enterprise spreadsheets are likely to continue to play a part in their risk management systems. The question is whether banks will heed the dangers inherent in these applications and seek the kinds of software solutions that can provide the governance, security, and controls to make them fit for a post-crisis world.
Coherent Spark acts as a complement to, rather than a competitor with, a bank’s existing risk management setup. With Spark, a bank can continue to utilize its spreadsheet-based applications while benefiting from enterprise-grade security, governance, and auditability features. Alternatively, it can convert a bank’s spreadsheets into secure APIs and eliminate the need to manually maintain an interconnected web of different applications.
Spark also enables firms to seamlessly connect their existing systems with other internal applications, helping maximize the value of their spreadsheets company-wide. In short, Spark can be the immediate, no-regret, stop gap to get control of financial models and gain the agility needed in these volatile times.
Request a demo with a Coherent Spark expert today.