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Human behavior based risk solutions have deficiencies. The aggregate impact of the top 50 operational loss events is estimated to be $60bn over a 12 month period. The notable cases over the past decade include the 2008 SocGen case due to unidirectional positioning and unsuitable investments in complex derivatives by JP Morgan, UBS and others in 2012.
Consequently, a safe financial institution now is not one which takes no risks or is risk-compliant, but one which is organizationally and technologically able to withstand the crises of the future. “Big data” and “big analytics” are rapidly being applied to enterprise risk, compliance and governance across all industry sectors. Recent settlements related to questionable business practices have further heightened interest in the management of operational risk at financial institutions. In addition to the above, the global slowdown has necessitated higher efficiency and lower costs. Thus, the past twelve months saw accelerated growth in big data analytics based integrated risk, compliance and governance solutions.
Here are the 7 trends to watch this year in this domain:
1. 2016 will continue to see a shift towards automated reporting and risk data aggregation to meet global regulatory standards. Further, the ongoing slowdown ensures that these governance, risk and data management practices will be outsourced.
2. Agile risk management solutions are the key for the sell-side to combat increased regulatory pressure, capital scarcity and time constraints. Hence, the sell-side needs to gear up with integrated solutions that enable optimization, limits management, margin simulations, liquidity and market risk management, stress testing and model risk management, data management and visualized reporting.
3. The buy-side continues to play a pivotal role in the financial system. Thus, face risk, governance and compliance requirements at par with banks. Integrated on-demand, nimble and bespoke solutions across asset classes are the solution.
4. The financial crime and cyber threats areas face a similar situation due to increased regulation. Here as well, the rise of integrated and aligned risk and compliance solutions will be essential to combat financial crime risks.
5. IFRS 9 will push financial institutions to perform more complex calculations. This in turn will require more extensive use of risk data and consequent investment in areas of event based accounting, real time cash flows and multi GAAP ledger functionality.
6. Stress testing models failed to spot 2008. Integrated enterprise wide stress testing and modeling will be necessary to reduce model risk. Key problem areas to overcome are alignment methodologies, information technology infrastructure and governance.
7. The energy trading market will shift towards network and generation based markets and away from the commodities trading market place. Thus, unique risk management systems for energy trading and logistics focused commodities trading will gain importance.
This is a small taste of what you will learn in Management Development Program, operational risk management workshop on 21st to 22nd January, 2016. Learn more about the program here.