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Recalculating Risk: The New Rules of Risk Management

New data management and risk analytics tools are giving banks such as ING, HSBC and Union Bank insight into enterprisewide risk exposures and a head start on Basel II rules.

ING's market risk management group has been building a new target operating model, and the bank is upgrading its risk management tools and processes for measuring and managing profit and loss, Value at Risk and other market risk metrics, Benichou reports. "We want to increase the frequency and quality of reports, we want to correctly assess different kinds of risk, and we want to analyze risk in depth," she says. "For that we need to have a maximum of information that we can display the way we want."

To build the new target operating model, the bank has had to determine the best sources of market data for each type of product and synchronize its sources. One challenge, according to Benichou, is that ING operates in markets in three sets of time zones -- Europe, the Americas and Asia. The bank freezes its market data at a precise market-close time in each region's default time zone. For instance, in Brussels, a snapshot of market data is taken at 6:00 p.m. local time and all risk measures, including VAR and profit and loss, are calculated at this moment.

Another challenge is that the bank uses three different front-office systems for equities, foreign exchange, credit and interest rate products. Despite the disparate front ends, the objective is to obtain consistent results for all three. "That's the target operating model -- the ability to align market data across systems and have the same source for all entities so, for example, you don't have dividend expectations in Belgium that are different from the dividend expectation in Amsterdam or London," Benichou says.

ING's current market risk management platform, which was developed in-house, works correctly, but it's not efficient enough to meet future needs, Benichou says. "Because the number of risk controls has increased significantly, we need to upgrade with better automation of tasks," she says.

The bank recently purchased a new risk management module that is part of Paris-based Sophis' RISQUE software suite to measure and manage risk across its equity, equity derivatives and equity finance desks as well as for commodities and hybrids. "With this new tool we're going to be able to run a new set of risk scenarios and P&L scenarios during the night, store them with long histories, and be able to analyze things with a time horizon," Benichou says. "We're going to improve the way we assess risk in ING."

The new framework boasts reliability, ease of use for risk managers and analysts, and performance, running a lot of data in minimal time, Benichou adds. It also should help the bank monitor counterparty risk on a daily basis. Deployment of the new tool will start in March 2010, and Benichou hopes to be in production by the end of the third quarter. "We expect a lot of things," she notes.

One objective for the software this year is to automate the dashboard that is presented to risk executives. "This will allow our management to have a very interesting overview of all risk embedded in our portfolios," Benichou relates. Dashboards and reports also are being refined because, as Benichou says, "Too many reports kill the reports. You have to create relevant reports so that in one look your management can be aware of everything."


Of course, relevant reports require accurate data. To better ascertain credit risk and the capital that needs to be held against it, a la Basel II, banks are building up their credit data platforms to better standardize and enable greater visibility of information, says Accenture's Klein. "Banks are working at being able to calculate their enterprise exposure across their organization against every counterparty and every product," he says. "Typically that involves multiple reports from multiple lines of business. Banks are gaining greater ability to respond to high-risk situations by having real-time access to that information versus needing eight hours to manipulate or develop reports based off multiple sources of data."

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