In 2012, the Fed tested the banks’ ability to withstand a crisis, similar to the one from five years ago, that caused unemployment to rise to 13%, a 50% fall in share prices, and a 21% drop in housing prices. Some of the top banks once again failed to show they have enough capital to survive another serious downturn. A Bloomberg article yesterday discussed how Fed regulators and the Dodd-Frank Act have been historically at odds.
Even after the past failure, banks were either too exposed outside the U.S. or were planning to hand too much money back to investors. This means, they lack a “single view” of global enterprise-wide risk exposure, with various internal silos only concerned with their own priorities.
A single snapshot of risk
In a mandate from a global governing committee, top banks have been given three years to build up a single view of all their risk to help make the wider financial system more resilient. These global banks have many branches and subsidiaries, complicating the creation of a single snapshot of risk. They will have to get on top of this initiative as a temporary stopgap, but what about future updates, and/or further changes in regulation?
Banks need to assess risk whether a regulation or a law mandates it or not. The end-game is what efficient compliance enables – long-term strategic and operational improvements, not compliance for its own sake.
Best practices change with time
We know best practices are imposed or forced upon banks and financial institutions to create stability and make entire financial system safer. That’s clearly needed. But best practices don’t remain best practices forever; they change with time and hence changes in regulatory mandates.
The minutest of changes can have far reaching effects. Complexity and greater cost lie in redoing systems and processes from scratch, which adds additional burden and risk on an already burdened infrastructure.
So, where to begin? With compliance mainly a play around people, processes, and systems (including data), the ideal approach is platform-driven, process-oriented and extremely flexible. This allows banks to accelerate operational risk management and compliance automation to quickly adapt to future changes. Applications or out-of-the-box solutions may do a great job in addressing today’s requirements, but are usually inflexible and unable to address inevitable future changes.
Breaking the silos
The FSI industry continuously struggles to keep up with regulation and continuous change. For the majority of players this situation is untenable. Traditionally, siloed departments develop individual measures of risk and compliance with less focus on global enterprise-wide management of risk and compliance processes.
Adding to the problem, traditional approaches make only make post facto analysis possible. Real-time or near real-time global graphical dashboards for reporting and accessing risk exposure significantly improve responsiveness. These tools provide visualization in areas of interest split into legal entities that capture often complex, inter-dependent and disparate relationships.
Banks have to look beyond compliance no matter the flavors of risk and regulatory mandates. Whether it’s calculation of global or local derivation, or aggregation of risk — integration is inevitable.
For more on how to integrate your systems to leverage Big Data, check out these Gartner reports: