by Rani Goel, Strategic Product Marketing for Analytics, SAP

Big Data_35998790-150x150If you’re a banker—anywhere in the world—the topic of risk management is near and dear to your heart. Since the 2008 financial crisis, it‘s become even more front and center in the minds of most bankers and government regulators. This landscape is not getting simpler, but actually grows more complex by the day.

Regulations and scrutiny are increasing, reputations and revenues are at risk. More volatility in the market, rising demands of shareholders, customers, partners, and vendors, (not to mention technologies such as internet and mobile banking) are changing the risk profile that a bank must manage and respond to.

With new regulations like the Dodd-Frank act and Basel III stress testing introduced to protect the consumer and increase financial stability, financial institutions need to consider the cost of compliance and impact on resources which can impact the banks’ ability to make loans and generate new revenues.

Survey Reveals Executive Risk Concerns and Approaches

A recent survey (June 2014) was conducted by The Intelligence Unit of The Economic Times (EIU) of 208 risk management and regulatory compliance executives at retail, commercial, and investment banks equally balanced from North America, Europe, Asia-Pacific and the rest of the world. I want to share with you some of the key findings.

  • Executives agree that Liquidity Risk (50%) and Credit Risk (45%) are the greatest challenges their banks will face in the next three years. While retail banks ranked credit risk as the highest area of concern, commercial banks and investment banks ranked market risk and operational risk higher respectively.
  • Banks also differ in the way they’re internally organized to manage risk, with the largest group of executives (38%) saying that they rely on separate analytical teams, combining analytical and risk expertise, to focus on specific areas of risk management. This approach has traditionally proven effective because it leverages the benefits of specialization by dividing risk into clearly-defined categories and placing it in the hands of subject matter experts.
  • Delivering comprehensive risk profiles was stated as a priority for every financial services company that responded to the survey, with an overwhelming majority (81%) of the executives stating that comprehensive data on the organizations risk profile is routinely provided to the board and senior management. Another 15% say that they expect to achieve this within the next three years.
  • Interestingly, the use of Big Data tools was associated with strong risk management performance. As the following chart shows, banks with above average risk control/mitigation performance are more likely to be using basic Big Data tools (65% vs. 7%) and advanced Big Data tools (64% vs 8%) now or expect to use them within three years.

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  • At the same time, the survey found that lack of data is the biggest obstacle to improved risk management outcomes. More than half of executives (51%) cite a lack of sufficient data to support robust risk management as one of the two biggest obstacles to improved risk outcomes. The other one being the challenge of extracting actionable intelligence from available risk data.

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Key Survey Results

The key takeaways from the survey findings are that:

  • Liquidity and credit risk are top concerns for banking risk and compliance executives. This likely reflects increased exposure to interbank and lending risk following the 2008 financial crisis.
  • Enterprise-wide approaches are seen as the most effective risk-management strategies for meeting liquidity requirements, anticipating market trends and guarding against credit and loan default.
  • The centralization of risk management at the enterprise level captures the economies of scale which are increasingly important with the growing use of Big Data analytical tools. These tools offer greater capabilities for interpreting external events in real time, more accurately modelling risk scenarios, and automatically generating compliance data.
  • Big Data applications that integrate novel and diverse data sources—from 24/7 mobile device sensor data to social media content—into traditional risk management frameworks are likely to gain traction as those data sources increase in value, volume, and velocity.

The survey was sponsored by SAP, to download and read the full report, please visit www.sap.com/banking.