October 31, 2014 - The estimated combined spend in 2012 and 2013 by banks on risk management systems was pegged at USD 44 Billion (Chartis Research – Global Risk IT Expenditure 2011, 2014-15) and is expected to reach a combined spend of USD 59.9 Billion in 2014 and 2015.

Having said that, surprisingly, even today, most banks do not have on-demand access to counterparty risks, exposures and intraday positions. Further, all this expenditure hasn’t resulted in the expected levels of risk mitigation either.  

Bank’s credit managers, risk officers and front-office teams spend days and nights collating counterparty risk and aggregated bank-wide exposures. And this happens despite banks having achieved the state of digitized transactions more than a decade ago thanks to core banking and transaction processing applications.

Transaction systems will continue to grow as banks introduce new product offerings and expand their geographical presence. Naturally, transaction volume will increase, and managing and mitigating risks takes a beating. Banks are not always able to aggregate risks as quickly and accurately as they accumulate assets. Data quality has been another area of concern, which prevents banks from identifying risks or appreciating their underlying magnitude. The later a bank reacts to deteriorating credit risk events, lesser the opportunity to protect itself from losses.

Clearly, the biggest value is expected from the money spent on banks’ internal costs. Therefore, unless banks’ internal organizations undergo cultural transformation with respect to how risk data is managed, no amount of regulatory change or reform will have an impact. Bringing this cultural change requires banks to define their data strategy in the form of a structured definition of risk data, its governance and management. Software can be an extremely effective means to implementing processes and empowering front-office teams, credit managers and risk officers with quality risk data and its timely availability; but not without the aforesaid critical cultural transformation.

This is where the Global Risk Management solution from TCS BaNCS can help banks. Underpinning the brand promise of ‘Un-complicate’, the solution helps define risk data ownerships, and empower risk/credit managers and front office teams. By drawing data in different formats from across the bank the solution enables banks with a reliable and valuable overview of bank-wide risk.

Banks achieving this transformation on their own is not a simple task as banks must now deal with a higher volume and variety of data which is, in turn, changing at a higher velocity. While various tools are available to consolidate data from multiple platforms and provide reports, the process engineering for establishing data ownership, its controls and governance cannot be achieved merely through tools. The end state of transformation demands the amalgamation of multiple specialist streams to establish:

• Defined data ownership, bank-wide Common Risk Data Models; enforcement of common data model usage
• Relationships between Risk Entities – Both, direct and indirect
• Continuous data quality control processes and protocols
• Aggregation of large risk data volumes and their timely availability
• Centralized limit management
• Risk monitoring, including early warning triggers

In most instances, banks lack one or more of the above requirements, and therefore, fail to execute the needed transformation on their own.

The Global Risk Management Solution (GRM) from TCS BaNCS brings together all the necessary expertise under a single umbrella solution to help banks deliver this transformational change. The solution establishes cross referencing with various system silos (Applications including Client, trading, transactions, RAROC, Ratings, Collateral, Models) to provide comprehensive risk dashboards. The solutions’ comprehensive and multi-asset data model helps future-proof banks’ risk management and readies them to onboard new asset class/products or more transaction systems from mergers and acquisitions activities.

With this solution, risk officers are empowered with aggregated bank-wide dashboards (e.g. counterparty ratings, credit lines, collateral, hedges, pricing) while the drill-down feature allows for the visibility of underlying asset quality. With timely availability of this information, the Exposure Management Group in a bank can efficiently plan for risk hedging and mitigation actions. Risk managers and front-office teams can be continuously empowered with information on counterparty behavior such as credit report expiry, limits and ratings expiry, collateral breach, exposure overdue, and excess drawing.

Further, the solution enables business teams to draw their own reports without any dependency on IT teams. Both risk and business teams can analyze customers’ exposure patterns, correlation of risk factors both, on current and historical data for better decision making.

The sheer magnitude of work for such transformation may, at first glance, seem overwhelming. However, the payback is exponential in impact compared to the investment made.

With TCS BaNCS, banks can look at deploying an integrated risk management solution that can help them take advantage of existing and future business opportunities and relocate capital and create portfolios with better risk-return traits.

1. Do Much More With Capital – The cost of incorrect risk data classification/quality is high.  Regulators demand Risk Weighted Assets (RWA) of up to 150% of the asset size.  While unrated assets may attract 100% RWA, A-rated assets would require only 20% RWA. Clearly, banks with unreliable risk data would need to hold much more capital. At an aggregated, bank-wide level, banks can free up to 10-20% excess provisions, RWA allocations, and Loan Loss Provisions (LLPs)to act as a cushion against the uncertain size of existing  inherent risks.
2. Tomorrows Information, Today – Banks can near eliminate surprises, and leverage early warning signals to identify, months in advance, which customers to watch out for. Customers at the risk of default can stand to benefit from banks’ experiences with similar businesses to overcome their difficulties.Early warning signals, such as outdated credit reviews and deviations from average credit utilizations, are visible six to nine months in advance, and this timely information can help the bank create a sound exit plan.
3. Make Risk Models Really Work For You – Risk Models are only as good as the quality of data input. There needs to be discipline and rigor in managing data quality and it needs to be inherent within the design of the technology. With high quality data, well-crafted risk models can provide immense value to the bank.
4. Keep Regulators Happy With Their Data Needs Data demands from regulators are now more frequent and also more random resulting in the need for banks to be data-ready at any point of time. For example, if regulators demand 11-month-old unsecured exposure positions for the real estate segment or single borrower exposure (with positions monitored daily), the TCS BaNCS solution can help a bank  provide all of this in a smooth and convenient manner. The biggest driver of this transformational journey is not just about complying with supervisory regulations, but keeping the risk of the most lethal kind which is Reputational Risk, at bay.
5. Productivity Gains Often, credit officers, who instead of spending time on analyzing customers and decision making, are grappling with problems of data collation and cleansing. With this solution, they are able to spend time profiling customers, evaluate multiple options and deliver on a better customer experience.

To summarize, the investment realization of such risk transformation program is swift. Unfortunately, not many banks have been able to realize these benefits due to the absence of a reliable and proven solution. The Global Risk Management solution from TCS BaNCS has helped banking institutions turn risk departments from cost centers to value churners.