October 27, 2011
Impact of technology in the Risk world
Market Trends
Risk management -Strategy & Appetite definition, Identification, Assessment (valuation & Aggregation), Monitoring, Controlling & Reporting is increasingly becoming technology dependent. Both traditional and innovative solutions are swamping the market place. One side of the spectrum is specific solution providers who provide components to address specific business modules like valuation to solution providers who provide integrated holistic end to end solution for risk management. Market is seeing large buyouts , many joint partnership models are designed to enhance market penetration – solution providers are realizing that gap in offering necessarily doesn’t mean that one needs to develop the solution to address the gap, collaborating with providers who already have an offering to address the gap would enable quicker and faster market penetration.
After the 2006 Sub prime crisis, risk technology solution market is crowded with lot of offerings but clearly one needs to wait and watch to see who would emerge as a market Leader, Follower, Nicher and Challenger. Market is waiting for solution which can be quickly implementable and can integrate with ease existing technology infrastructure of financial institutions which ranges from complex technology solution to spreadsheets based applications popular among traders and risk managers.
Technology Trends
Data services offering continues to generate demands followed Bi & Analytics. Then there is big ticket item in risk technology space – Real time risk. Real time risk assessment helps in measuring risk at trade, desk, portfolio and enterprise level on a real time basis (ranges from few mins to hours depending upon the data volume and processing capabilities ) - is driving specially Tier 1 banks to invest in real time risk solution and infrastructure. Even hardware and software pure plays are focusing on how to improve on latency front with offerings like appliance approach (hardware and software offered as one stack), even Grid , in memory database are not alien to financial institutions and they are eager to embrace such technology marvel to create state of art risk solution. BI solution providers have also geared up now to offer solution like column database, Change Data Capture etc. which lead to faster processing, low latency. Middleware technology like Complex event processing are now empowering financial institutions to design portfolio strategy (buy, sell, hold) and risk assessment (what if etc.) in response to market news like natural disaster, corporate actions, mergers and acquisitions etc.
Market is also seeing great momentum in improved mathematical modeling for e.g. to measure VAR specially when model assumptions are stressed (Stressed VAR), CVAR, liquidity modeling and long tail analysis are also in limelight. Distressed asset valuation, Mortgage based asset valuation and risk assessment are finding good market post crisis.
What are the Business challenges?
Financial institutions are struggling hard to manage and measure liquidity risk. For Financial Institutions which has retail and Investment Banking arm it is nightmarish challenge to have a holistic integrated picture of liquidity risk. Counterparty risk measurement , risk valuation model incorporating CVA (Credit Value Adjustment) are also in big demand post crisis specially when deluge of regulations are waiting to unfold soon. Financial institutions have overarching challenges to implement recommendations of Basel III ,Dodd Frank act - any technology solution provider who can offer seamless and painless solution to address this future regulatory roadmap would clearly may emerge as a leader. The daunting challenge would be though to fit in the solution seamlessly with existing heterogeneous technology solutions within the bank.
Stress testing is now mandated by many regulators and financial institutions are grappling in dark to look for easy technology solution to collate and analyze huge volume data to design stress scenarios for comprehensive stress testing.
Who holds the Future Innovation Mantle?
Real time offering has to enable availability of risk reports in various platforms like Mobile, iPad etc. There is a rush to address this need. Workflow wrapper defining risk governance is also fast evolving.
Integration of complex technology like CEP, BI reporting , mobile interface ,workflow are bundled together to offer niche solutions.
Risk Management technology solution is entering into an interesting phase - There has been some momentum to design solutions to address behavioral aspects of risk management as well. Meandering of behavioral science and risk management opens a new vista and thinking in risk management. Cabot Research is a pioneer in this space.
Though not much work has happened to integrate social media ,BI and risk solution but the time is not far when such solution would hit the market. Twitter message analysis is in place which analyses investor perception and buzz on market, particular stock etc. There lies an unchartered space where social media and BI integration would enable behavioral analysis of market participation.
Cloud hosting is just making foray in risk space and is expected to grow in manifolds in future.
Risk management market continues to grow over 13% year by year and lot of technology innovation would drive the market to new consolidation, thought leadership and pioneering and initiatives.
Posted by kb0905 at 08:52 AM
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