The various systems used to monitor and manage trading and banking book risks are essential to the regulatory and prudential measures that are designed to enhance the stability of the banking system and deter inappropriate risk-taking.
While the systems concerned rarely enjoy high management visibility, banks are finding that their existing capacities will need to be significantly upgraded, or replaced altogether, if they are to meet new business and compliance obligations.
The scale and complexity of that task is not always recognised at senior management or board level. Big-ticket, off-the-shelf solutions may not be applicable, or require significant customisation and configuration effort to adapt to the specific institutions needs. Failure to appreciate the nature of the challenge could be an expensive oversight given the propensity of complex IT projects to under deliver.
On the banking side, the systems in question typically cover such matters as asset and liability management, liquidity and funds transfer pricing. For the trading books, they can include front office trading platforms, market risk, counterparty credit risk and credit valuation adjustment. System support for these functions was often creaky before the GFC, and it cannot respond to the new and additional demands now being asked of it.
Whilst many would consider these requirements to yet another drain on business they also provide an opportunity to enhance value.
- Improved CVA accuracy allows more accurate pricing providing a competitive advantage and to increase market share.
- Reviewing systems provides an opportunity to streamline and increase efficiency.
- Greater goal congruence through rewards based on risk-adjusted returns.
- Use of economic offsets reduces risk exposure allowing for a greater volume of business.
- Improved reputation and relationship with regulators by implementing best practises prior to regulation forcing its use.
Projects involving upgrading or replacing these systems are likely to be large, complex and high risk. Here’s why.
- The systems in question deal with large data throughputs. They are computationally complex and require specialised financial knowledge.
- Timely and reliable computer performance is critical.
- Project managers have to deal with multiple stakeholders with potentially conflicting requirements and aspirations.
- Because banks and other financial institutions refurbish or replace the systems in question infrequently, they are unlikely to possess all of the required skill sets internally. Specialist knowledge requirements mean that generalists will not get up to speed within a reasonable time.
- Processes are typically highly interdependent, making it difficult or impossible to deal with them in isolation. Limiting the reach of projects to save money can be counter-productive. At the very least, there is likely to be a large upfront investment in analysis or the organisational structures and business processes impacted.
- System and infrastructure design should be future-proof and conducive to inter-system communication and the integration of legacy systems.
Given the magnitude of the task, it is imperative to assemble a project team that possesses the skills and resources to deliver successful outcomes. Properly defining the project’s scope is a necessary first step and one that must identify knock-on effects for other processes and systems. Knowledge of the theoretical foundations is essential, as is an understanding of domestic and offshore regulatory developments. The ability to liaise with regulators at a technical level is also vital.
Successful outsourcing of infrastructure and applications to external suppliers still requires a strong systems engineering background, sound knowledge of the processes involved and the nature of the outcomes required.
There are many risk projects either underway or imminent in the banking risk space that are both high risk and potentially costly. Assembling a competent team should be the highest priority. At a minimum its skill sets should cover finance, systems, process engineering and project and change management. It should be given the resources and time to do the job properly.
As the necessary skills are in short supply, early movers will be best placed to obtain good outcomes.