Banks need better risk info

With the turbulent events of recent months in the money markets and a stabile global economy a distant memory, forecasters and governments are expecting long-lasting consequences for the global economy.

The Government and the Bank of England have already made commitments to inject the financial system with large sums of money, interest rates have been cut substantially and interbank, small business and export lending has been guaranteed.

Additionally, the collapse of high profile investment banking firms has been attributed to a catastrophic failure of risk management at all levels and businesses are mainly concerned with the survival and maintenance of their market positions. What’s more, European companies have started to cut their IT budgets.

As a result of the credit crunch, a change in attitude towards risk, the valuation methods and efficient risk assessment are likely to have reached the top of the priority list for financial institutions. However, finding a way to achieve this change is not likely to come for free and the news that IT budgets are being cut stands in contradiction.

There are a number of recent reports that support these assumptions. KPMG’s latest report (Banks urged to grasp risk management) on risk clearly blames an irresponsible risk culture, a lack of risk governance and appropriate risk measurement and reporting for the existence of the current crisis . The report goes on to suggest that these areas should now be investment priorities for banks moving forward.

“As a result of the credit crunch, a change in attitude towards risk is likely to have reached the top of the priority list.

However, while a change in attitude towards risk forms an essential part of the changing lending landscape in 2009, it is the ability to document the risk profile of the lending portfolio, which requires the availability of quality data, risk models and ongoing expertise that is the major factor in the successful management of risk in commercial lending. This is particularly important for Basel II compliance, which is often seen as a burden but can be a key differentiator.

By achieving compliance, banks will not only satisfy the regulators but can also expect to see substantial business benefits. Commercial lenders are required to risk rate each customer and demonstrate greater levels of transparency and accountability, capture data more extensively and accurately while interfacing with a risk rating model.

A change in attitude towards better risk management is a cornerstone of improved portfolio management. However, risk management systems will enable banks to establish a strong position in this changing market. Despite the economic situation, the financial services industry should think carefully about reducing its IT spend in the coming twelve months.

Mikael Krohn is vice president, EDB Business Partner