Following the financial crisis, new ways to measure risk — including stress testing — changed the way the financial services industry monitors risk. Today, however, compliance experts warn that over reliance on modeling is a risk as well. In other words, who is measuring and monitoring the models?
To respond to these concerns, Oracle Financial Services has expanded its Oracle Financial Services Enterprise Risk Management suite to include a new model risk management solution, as well as enhanced offerings for regulatory capital management and credit risk management.
"Stress testing is well established," said S. Ramakrishnan, group vice president and general manager, Oracle Financial Services Analytical Applications in an interview with Wall Street & Technology. "Now, every financial institution has also built risk models and they rely on them to determine exposures. But who is managing the models?"
Managing and monitoring the models has created a new risk discipline, which could be called model risk management, added Ramakrishnan. "C-level executives will want to know how the models are built, and now they are monitored," he says. "Everyone is relying on models now, so they have to be accurate."
[For more risk management, read: Q&A: JP Morgan Reveals Most Effective Risk Management Processes.]
To meet evolving regulatory mandates, financial institutions require a view of risk across all financial and business models. Many firms are struggling to achieve this transparency because they continue to manage their models in siloed environments, according to Oracle. Oracle Financial Services Model Risk Management product provides an environment to manage all risks associated with the use of models, including risks arising due to poor data quality, incorrect or inappropriate use, design flaws, incorrect implementation and unauthorized access.
The solution delivers a single repository for all model information across the enterprise, includes pre-built dashboards and provides drill-down capabilities for added insight, according to Oracle. The product also helps firms to improve governance around the use of models through a structured and consistent framework for periodic assessment and validation of models across categories.
Oracle’s Enterprise Risk Management suite, part of the Oracle Financial Services Analytical Applications family, provides a single, unified platform that helps today’s financial institutions meet complex compliance requirements and performance objectives. The platform enables financial services organizations to effectively identify and manage risk to support their risk-adjusted performance objectives, promote a proactive risk management culture and mitigate the costs of compliance.
"Today's financial institutions need a comprehensive understanding of their risk-return to make strategic decisions that strengthen competitive advantage, reduce the overall cost of compliance and enhance long-term customer value," said Ramakrishnan in a statement. "The Oracle Financial Services Enterprise Risk Management suite is built to meet these requirements. The platform delivers a consolidated view of risk across the enterprise, enabling firms to make faster and more informed strategic capital decisions."
In addition to the model risk product, Oracle's Financial Services Credit Risk Management provides a single view of portfolio credit risk across an organization -- including product types, lines of business, geographies and legal entities -- by combining results from multiple sources (capital adequacy systems, modeling applications, trading systems and external data). The application enables risk managers and c-level executives to quickly and comprehensively identify and evaluate portfolio risk from a top-down enterprise view of metrics.
Lastly the latest release of Oracle Financial Services Basel Regulatory Capital offers a complete solution for Basel III compliance, covering multiple risks, portfolios and asset classes. It enables financial institutions to quickly achieve Basel III compliance with a ready-to-use analytical solution. Version 6.0 includes functionality to address Basel III leverage ratio, capital adequacy and capital buffers. Enhancements include new/modified rules for computation of credit valuation adjustment (CVA) capital charge, re-securitization charges, minority interests, deferred tax assets (DTAs) and revised criteria for available capital.