Transforming the Risk business: Two decades of technological innovation

Director, IBM Risk Analytics: Financial Engineering, Research and On-Cloud Solutions, IBM

Imagine you are working in a financial institution in the mid-1990s, and a time traveler—perhaps in an antique blue police box, or even a DeLorean—takes you for a ride twenty years in the future. Aside from ubiquitous mobile devices, the details of your everyday life are probably very much the same. It is only when you walk into your office that you realize how radically technology has transformed your world—financial services, and especially the role of “risk”—in just two decades.

In the beginning: From light touch regulation to the Global Financial Crisis

Recently, while working on my session with Neil Dodgson for the Smarter Risk Summit 2015—Innovation in a New Risk Environment—I have been thinking about the remarkable rate of industry and technological change since I began my career in Risk in the mid-1990s. At that time, the role of “Chief Risk Officer” was still new, and the first technology solutions were just being developed to address the emerging function of enterprise risk oversight.

Looking back, the years before the Global Financial Crisis of 2007-8 can seem like another lifetime. Bank capital was plentiful and financial regulation was comparatively narrow in focus, with capital adequacy as the primary driver of the developments from Basel I through Basel II. Then, as now, technological innovation in the financial sector—for providers of both trading and risk management solutions—was driven by the changing requirements of industry. Prior to the crisis, when financial innovation in derivatives and exploration of new and exotic assets drove growth capital markets, risk management focused on designing multi-asset class risk infrastructure, and enabling consistent aggregation of risk at enterprise levels with support for new, pan-asset class methodologies such as Value at Risk (VaR) and stress testing.

Then came the Global Financial Crisis…and everything changed.

In the wake of crisis: Building confidence with trustworthy risk analytics the wake of the Global Financial Crisis liquidity dried up, and financial innovation dropped off. For derivative trading systems, this new market reality required support for dual-curve pricing and a range of xVA metrics to address imperfections in capital markets that could no longer be overlooked. For designers of risk management solutions, this necessitated alignment with the new methodologies of derivatives trading—capturing emerging dual curve conventions and incorporating xVA metrics. In response to industry demands, risk management developed enterprise architectures with 24/7 availability and support for deal-time analytics—integrating the front and middle offices as never before.

And then there is regulation. In the post-crisis financial universe, regulations evolved far beyond a narrow focus on bank capital, with new legislation and regulations such as Basel III seemingly ever-increasing in both scope and depth. Risk providers have been responding to needs of industry with solutions incorporating change management capabilities to meet these rapidly evolving regulatory requirements. Moreover, both regulators and clients are increasingly demanding that risk systems be transparent with regard to the full data lineage of any analytics—ensuring that users can place their “trust” in the numbers—with comprehensive model risk governance, including workflows around auditing, escalation and remediation processes across the lifecycle from model initiation to retirement.

Today, as I look across the industry, the trend among leading financial institutions is for an “integrated risk platform” that offers the confidence of meeting these diverse challenges, with:

  • “What-if” deal time support, closely linking the front and middle office
  • Support for business activities across the enterprise, and spanning the balance sheet
  • Consistent and accurate measure and management of market, credit and liquidity risk
  • Integration of risk governance and risk measurement, to ensure trust in the analytics

Welcome to the cognitive era: Risk management in the age of IBM Watson

And what of the future? In risk management, that is obviously a loaded question. Certainly risk systems will continue to evolve in response to industry and regulatory requirements. Big data is already beginning to transform the way financial institutions will engage with risk solutions—integrating heterogeneous data supply chains, having access to “all of the data, all of the time,” and with much greater agility to adapt to changing requirements. Risk technology solutions taking shape in the labs of today—to be deployed in the near future—are increasingly incorporating predictive, cognitive and optimization analytics. We can see this in the next-generation risk intelligence IBM is developing with Deloitte, that will empower financial services firms to better manage risk and regulatory compliance. With the capability to derive actionable insights from not only structured data, but also unstructured or “dark data,” financial institutions will be able to identify potential loss events and risks to the firm before they even emerge.

Attend IBM’s Smarter Risk Summit 2015, to learn how IBM advanced risk analytics and next-generation governance, risk and compliance solutions are today helping financial institutions unlock value with actionable risk insights for growth and competitive advantage.