Weak Links in Risk Management Programs

An article published in the current issue of Bank Systems & Technology discussed the weak links in the risk management infrastructures of some of the larger financial institutions during last year's economic meltdown.  It seems that many institutions had to rely on highly manual, time consuming processes to understand their full risk exposures. Here is their view.

Weaknesses in the infrastructure often limited banks to identifying and aggregating exposures across the bank. A fragmented risk architecture dispersed over a multitude of systems made the reconciliation of the relevant data a time-consuming exercise, which was at best semi-automated, but more often a manual process. This led to banks needing far too long to aggregate their exposures and other relevant accounting and risk figures on a firmwide level. In the bankruptcy case of Lehman Brothers, for example, it was reported that it took some banks more than three weeks to determine their overall exposure to Lehman.

An inflexible risk environment within the banks rendered them incapable of reacting to sudden changes driven by external and internal circumstances—for example, the ability to perform ad hoc stress tests to assess the impact of new stress scenarios designed to address a rapidly changing environment.

In short, the interlinkage among risk types was not captured. The recent crisis has exposed the strong dependency among credit risk, market liquidity and funding liquidity pressures. Banks need to move away from silo-based risk management to achieve a more integrated and connected way of managing risk.

An integrated approach is not only required, it is also the most cost-effective solution in times like these.  Wheelhouse Advisors provides services to help companies build an integrated risk management program.  Visit www.WheelhouseAdvisors.com to learn more.