Today, the practice of financial services risk management has become ever more sophisticated, relying on an ever-increasing number of mathematical and statistical approaches. Over time, value at risk (VaR) analysis has become a go-to for investment and commercial banks to measure and mitigate their risk exposure.
VaR has become popular because of its flexibility. It could be applied to just one given position, entire portfolios, as well as the institution’s wider risks. However, VaR and other risk models have shown their limitations in recent years. Standards such as the Fundamental Review of the Trading Book (FRTB) have been put forward to further improve financial services risk management and to provide institutions with uniform benchmarks that enable more accurate comparisons.
Given all these developments, updating risk management solutions is vital. Banks and other lending services can no longer expect to effectively control their risk exposure unless they transition to a contemporary risk management system that takes all these recent changes into account.
Here are some of the features that no modern credit risk management solution should be without.
Meet Challenges Posed by the Fundamental Review of the Trading Book (FRTB)
Any software acquired for financial services risk management should be able to account for different FRTB requirements and challenges out of the box. This ensures fewer issues and better reliability when making complex risk calculations compared to ad hoc FRTB compliance solutions. This will be especially important for institutions that choose to implement the Internal Models (IMA) approach given the immense computational requirements needed.
Apart from requiring new computational models, FTRB also has requisites for data governance, storage, and data cleansing. Purchasing a solution that is already pre-configured and fully optimized for all FTRB requirements reduces the risks of fundamental errors, delays, and crashes while also saving time compared to customizing an older system that does not natively support the standard. Doing so will also ensure perfect compliance with FTRB and other relevant standards.
Support Multiple Models
The FRTB and IMA are not the only models used in risk management. Software for financial services risk management should also be able to run VaR and other models to validate computations and give analysts and managers a more nuanced understanding of market risks. Ideally, the system should also be flexible enough to use any risk calculation model the institution’s analysts require.
Mitigate Current and Future Market Risks
The core functionality of risk management solutions should not be compromised. The system should also be able to identify a comprehensive selection of risk factors and permit users to fully define different risk criteria that could be run through the different risk analysis models. Additionally, the software should allow users to be able to assess risks with any level of granularity that they require.
These features are necessary to provide decision-makers with a properly nuanced view of the credit risk presented by entities of all sizes at different levels. This potentially allows better risk management across a wider selection of clients.
Additionally, more advanced features such as simulations and forecasts need to be included to aid analysts and managers in understanding different potential scenarios. These could leverage data from the risk management system as well as other parts of the institution for a deeper insight into potential risk exposure.
Integrate with the Institution’s Current Systems
Coming off the previous point, system compatibility is a must when shopping around for a new risk management solution. Traditionally, data was often heavily siloed, making it difficult to obtain a complete picture of an institution’s financial position. The experiences of the past generation have shown that being able to leverage “big data” can be a gamechanger for institutions engaged in financial services risk management.
Being able to have relevant information instantly available to anyone in the organization who needs it does away with the need for manual data wrangling, resulting in more data transparency and accuracy. It also allows traditionally separate departments such as sales and client relations management to fully synergize with credit risk managers, reducing inter-departmental friction and enabling better service.
Scale According to the Institution’s Needs
Financial institutions do not operate in a static environment. For this reason, systems also have to be easily scalable to match whatever the institution needs. This way, sudden expansion or downsizing will not render the chosen risk management solution inadequate or unjustifiably expensive.
Today, the most popular way to ensure scalability is to use SaaS solutions that allow hosting on an offsite server. To scale up or down, all an institution has to do is choose a more appropriate subscription plan. Additionally, this has the advantage of permitting the institution to set up wherever they need to without the need to maintain a large finance IT team.
It’s Time to Update Your Credit Risk Management Solution Changes in the credit risk environment have put a time limit on the viability of many commonly used risk management solutions. Thankfully, updating to a better system is easier and more convenient than ever before. Additionally, institutions that get modern credit risk management solutions not only mitigate threats but also improve their overall competitiveness in a rapidly shifting market.
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