Managing Risks with Data Management

All kinds of business are exposed to different types of risks, be it operational, legal or financial. The seriousness of these risks depends on the type of services or goods provided by the company, the use of risk avoidance strategies, and various external factors like geography and the economy. Companies work hard to avoid or minimize the risks that can potentially affect their existence.

There are generally two components of risk ”“ exposure and uncertainty. A risk is the probability that an action or outcome can adversely impact the company. For financial institutions, this may lead to financial losses or to the imposition of penalties on a company that can impede its ability of satisfy the business objectives or carry out business.

Types of Risks in the Finance Industry

A risk is commonly defined based on its various sources and its negative impact to profits. According to the Guidelines for Risk Management, there are generally four (4) types affecting the financial industry.

Credit Risk: Incurred due to counter-party defaults, this type of risk happens when investing, lending, or buying/selling financial assets for others. This is related to financial transactions where a borrower defaults in making a repayment.

Market Risk: This defines the unpredictability of market value or income due to fluctuations in underlying market issues such as credit spreads, currency, and interest rates, usually resulting from the mismatches between an asset’s risk profile and its funding.

Liquidity Risk: This defines the risk of being unable to meet commitments or being unable to offset positions by a company within the time constraints, leading to non-liquidation of assets at rational costs when required.

Operational Risk: This risk results from the insufficiency in the organisation, conception and implementation of processes for recording operational transactions into the bank’s information or accounting system.

Managing Financial Risk with Data Management

Financial institutions employ risk management, the process of analyzing risk exposure, in order to minimize risk through various means. It aims to create economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk.

Data management in the financial industry has become increasingly challenging, with financial institutions, exchanges, and market participants undergoing significant transformations. Today, more regulation exists, instruments are becoming increasingly complex, tracking is more automated, and transactions are more programmatic, resulting in the rise of serious data management concerns in the industry.

According to the Global Association of Risk Professionals, there are three major challenges of data management in the finance industry:

1. Finding the right information: Relevant data is buried into disparate systems and units, and these silos never get synchronized
2. Transforming dissimilar data into meaningful information: Silos have a partial version of the truth, the information structure is never homogeneous across systems, and data consistency is a challenge
3. Presenting the right information to the right people: Risk metrics cannot be simply added to measure KRIs vs. KPIs, there are static indicators vs. dynamic indicators, and the level of detail is not easily available

In order to address the challenges of data management, and to minimize the impact of risk, financial firms need to consider the following:

1) Integrate the data tools used by the enterprise

Converting several discrete tools to a unified data management platform can dramatically improve the company’s ability to deliver the degree of data integration and quality needed to support risk management. An integrated platform allows the business to perform metadata analysis, data profiling and monitoring, data enrichment and entity resolution.

2) Employ a unified system built on an industry data model.

Design the system specifically for risk analytics and reporting, not transactions, to fortify the company’s risk management. Once the risk data is collected into a unified repository, it is easier to analyze market and credit risks, asset-liability management and liquidity risk. This allows the company to aggregate risks across its portfolios, providing a complete picture of the risk to the firm.

3) Utilize an integrated, enterprise-wide governance, risk and compliance system for regulatory compliance.

This will let the firm:

• Regularly get feeds on new regulations faster
• Create action plans to attain compliance
• Give proactive alerts to ensure completion
• Show results visually via a dashboard

Provide updates on the progress to all stakeholders

Minimizing Risk with Data

While it is impossible for financial institutions to remove all risk from the firm, it is important for firms to properly understand and manage the risks that they are willing to be exposed to. Effective data management plays a key role. Finance firms can improve their data quality, consistency and operational efficiency by changing their data management infrastructure so that critical applications access and update are integrated. Improved data quality, adequate risk analytics, and flags for compliance better enable financial firms to hedge well against risk.

– Data Czar @ DEO