Banking is about managing risk and multiple risk types. In fact, a bank's raison d'être is to accept structured uncertainty and manage the associated risks, with the goal of capitalizing on these risk differences to earn profits. The skill with which your bank balances alternative risk/reward strategies will determine your ability to deliver on shareholder returns.
However, in a market environment where competition, globalization, market volatility, and structural change are increasing, you need to manage their risks even better — and with greater transparency. In addition, the Basel II requirements have galvanized financial institutions around the world to re-evaluate the role of risk management.
The financial crisis that started in the summer of 2007 with a sharp devaluation of U.S. sub-prime mortgage assets and continued with the $700 billion government bailout in 2008 has raised concerns about the effectiveness of banking risk management. Several issues certainly deserve specific attention, including the effectiveness of exposure control processes, the objectivity of credit derivatives valuation and the bank's ability to respond to rapid changes in market liquidity.
At one level, banks need to assess credit and operational risk and use empirical transaction data to confirm that reserves are set correctly for balance sheet capital contingencies. The collateralization of mortgage and consumer loan portfolios into the secondary market is an example of market risk management. Today there is great debate around the global parameters that monitor market risk and support or maintain market stability. Given the various risk parameters, the key is to identify where and how a bank can proactively manage its risks and various assets— physical, financial, and human— to its advantage.
Risk mitigation strategies are a top concern for the board, senior executives, CFOs, and risk managers. And despite the need for rapid change, a recent IBM study found that two-thirds of financial markets firms rate their agility as moderate to poor —and less than 5 percent feel confident about their risk management capabilities.
Your challenge is to implement an integrated approach that can be ingrained in your organization and its management practices. Without a coordinated risk management strategy, organizations will continue to struggle with repeated policy iterations before risk handling procedures and controls are efficiently aligned.
Simply put, banks must get a handle on risk management. It is a key link to instilling more customer confidence, higher profitability, and company longevity. We will discuss the seven dashboards every bank should have and how IBM Cognos® software can help you facilitate better risk decision-making throughout your organization.
Banks are facing the greatest challenge since the 1930s. Several of the largest banks have failed or been sold at fire-sale prices, the quality of underlying loan assets continues to deteriorate, and the availability of credit — for both bank-to-bank lending and bank lending to customers— is more squeezed than ever before. At the most basic level, the culprit for the enormous upheaval is simple— poor credit decisions.
Now, more than ever, banks need to turn the reams of information at their disposal to accurate, actionable insight about credit risk. Banks need a better understanding of the performance of their loan portfolios and the effect of credit risk performance on profitability, so that they can take the actions required to ensure healthy, profitable lending operations.
IBM Cognos 8 Banking Risk Performance— Credit Risk (IBM Cognos Credit Risk Performance) is a packaged analytic application that provides you with standard reports and dashboards to accelerate access to credit risk insight. Faster to implement than building a custom solution, it includes a data warehouse with a dimensional data model specifically for performing analysis. It also includes packaged reports and dashboards designed for managing credit risk. Credit Risk Performance allows your bank to answer key credit risk questions such as:
• What are the delinquency levels in the portfolio?
• Which products, geographies, business units, or vintages are performing well, and which are performing poorly?
• How much of the portfolio is rolling from one delinquency bucket to the next?
• What are credit scores throughout the portfolio?
• How many new loans are being originated, and with what characteristics?
• Are charge-offs rising or falling, and is one product type or geography experiencing more charge-offs than another?
• Are receivables, delinquencies and charge-offs in-line with forecasts for these metrics?
• How is the portfolio performing on such metrics as probability of default, loss given default and exposure at default?
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