By Falk Rieker, SAP America

While the latest travails in the financial services industry were a decade or more in the making, the time is now to prevent plunging world markets into deeper despair. According to the Milken Institute, one common thread runs through all facets of the crisis from Main Street to Wall Street: excessive leverage. Homeowners and major financial firms alike had assumed too much debt, while, at the same time, taking on too much risk.

So, faced with turbulent economic conditions, governments, banks and regulators worldwide are working hard to manage risk and restore confidence in the financial system. More and more, banks must simultaneously manage the convergence of financials and risk management in business units across the enterprise and the much more sophisticated consumer behavior patterns.

As a result, these increasingly demanding customers, regulators and shareholders—who sometimes have conflicting viewpoints— have forced banks to find better ways to identify, manage and price the added credit, operational and market risks.

Getting to the root cause
Since one of the primary causes of the present financial crisis was unsound risk-management practices, particularly in the United States, experts agree that the primary focus of surviving, but struggling, banks should be managing risk.

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.

It is generally understood that more transparency is needed, and banks must accelerate their risk reporting process and improve ease of use and interpretation. Laboriously assembled and manually composed risk reports are often overly complex and outdated by the time they are distributed to senior management. In many cases, these reports are too technical to be grasped by senior management, since interpretation of risk figures requires expert knowledge.

‘Clear’ strategies for success
For many years, no definitive banking platform existed that could offer the long-term value needed to justify a huge investment. Now, a volatile mix of the global economic crisis, new business risks and empowered stakeholders have created a “new reality” for the world’s financial services industry—a “clear enterprise” that demands openness and transparency. Banks must find the technological ways and means to transform to an innovative business model that is not just “me too” against their competition, but a quantum leap over them.

Banks must find financial and risk management solutions to identify, manage, and mitigate credit and operational risks. The right infrastructure can supply reconciled data for all relevant risk and finance applications; provide timely analyses of all key risk indicators in a consistent way across the enterprise; implement a system to measure, track and monitor exposure limits matching the bank’s risk appetite; and support implementation of segregation of duties and controls requirements for improved governance and compliance.

To achieve this and survive in today’s economy, banks need to see clearly, think clearly, and act clearly. In short, they need to become clear enterprises where the leaders and employees know what’s going on in every aspect of their businesses and business networks.

To attain clarity and transparency, banks must use a portfolio of IT solutions that help them close the gap between strategy and execution, thereby optimizing the performance of their business and network. These solutions provide the required insight for improved performance, efficiency for optimized operations, and flexibility to quickly adapt to changing circumstances.

Encouraging signs
A number of banks and financial service providers have already taken these steps. For example, Goldman Sachs went through process reengineering when its leaders realized they were data abundant, but information deficient. They realized that to stay ahead of competitors they needed to empower analysts and portfolio managers with the right analytical tools to track market trends and risk exposures quicker so they could make the most informed decision. Information is now delivered to each analyst or manager based on each specific role via self-service reports and dashboards.

With broader insight, improved efficiency and flexibility, other banks and financial services institutions can become more transparent, accountable, lean and agile, and collaborative while keeping the customer as the central focus. The clarity provided by the right IT ecosystem can help banks preserve profitability by addressing the challenges of managing cash, mitigating risk, improving customer loyalty, streamlining operations, supporting sustainability, and leveraging talent. Only those that have the ability to act with such clear insight will survive current conditions to emerge in a stronger competitive position.

Falk Rieker is VP, financial services solutions, Americas, SAP America.