Liquidity Risk Continues to Haunt Firms Two Years Later
Why It's Important: In order for capital markets firms to finally put the credit crisis in the rearview mirror, they need to have a firm grasp on overall risks -- liquidity, counterparty, credit, operational and market -- to satisfy regulators and win back investors' confidence.
Where the Industry Is Now: Two years after the Lehman Brothers meltdown, financial firms are just starting to get a handle on the various risk exposures that crippled the world economy. The credit crisis made it painfully apparent that financial institutions' risk management capabilities were not up to snuff. Although business units calculated risk on a business unit basis, rarely was a complete enterprisewide view of risk available. Without a complete view of risk exposures, firms are vulnerable to severe market shocks and events that shift market dynamics quickly.
The challenge of quantifying risk across multiple business units, however, cannot be understated. But firms have taken steps to overcome significant obstacles, including disparate data sources, incompatible risk models, ownership issues and often petabytes of data. Even smaller capital markets firms face these challenges, though typically on a smaller scale.
During the past two years, firms have focused on integrating data, setting up companywide risk/governance policies, and analyzing data to help executives and risk managers determine overall risk exposures. Enterprisewide snapshots of risk, however, are still incomplete. "Risk is a consuming issue for customers, but we are seeing continued frustration in the quality of data," says Neil McGovern, director of marketing at Sybase. "People have been pounding away on data for a while, but the data isn't getting any better," though progress has been made for risk management purposes, he adds. In a survey of customers on risk management challenges, Sybase found that "the No. 1 issue was data integration and coming up with a single view of data across the enterprise," McGovern adds.
Focus in 2011: As financial firms strive to increase the quality of their data, they will continue to enhance and tweak their risk models to help identify exposures, especially credit risk and liquidity risk. Looking back on the credit crisis, most models never accounted for a systemic lack of liquidity.
"We are all guilty -- risk providers and risk practitioners -- because our models were not taking into account a loss of liquidity in the market," acknowledges Dario Cintioli, director and global head of risk at StatPro, a provider of investment analytics. "The true answer is, before the crisis, most firms had not done a lot of work on liquidity risk. All of the providers are working on improving liquidity risk models now."
Industry Leaders: All financial firms are working to improve risk management capabilities and will continue to implement more advanced analytics to quantify risk across the entire organization.
Technology Providers: A thorough risk management strategy has many parts, including consolidated data management, analytics tools, and reporting and governance processes. There are technology and service providers that can assist in all aspects of an enterprise risk strategy. The fine-tuning of risk analytics tools to match each bank's own risk appetite, however, most often is calibrated by risk professionals internally.
Price Tag: The cost varies for each part of a risk strategy, but it is something that is on the top of most firms' priority lists. The cost of not having an adequate risk analytics strategy and governance procedures can cripple a capital markets firm.
Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio
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