Proceed with caution

As a new era of regulation dawns, Raffi Festekjian, CEO of the Finance, Risk and Compliance unit for Wolters Kluwer Financial Services, explores a more integrated approach to risk management


Across the globe, financial institutions are rethinking and implementing new approaches to risk management; setting up committees and unifying financial, compliance and operational risks in order to establish an enterprise-wide risk management culture across the institution. Breaking down silos and understanding the complex relationship between all types of risk (both financial and non-financial) will aid in identifying programme gaps and in doing so, limit exposure across the firm.

Establishing an enterprise perspective
Risks are considered warranted when they are understandable, measurable, controllable and within an organisation’s capacity to readily withstand adverse results. Sound risk management practices enable them to take risks knowingly, reduce risks where appropriate and strive to prepare for a future, which by its nature cannot be predicted with absolute certainty.

The economic and regulatory pressures driving the financial services market today have created more explicit mandates to manage risk across the enterprise. These include those driven by Basel II & III; which aim to ensure that credit, market and operational risks are quantified, and strengthen the capital adequacy requirements of banks; Solvency II, which harmonised EU insurance regulation aims to ensure capital adequacy of insurance firms; and the International Financial Reporting Standards (IFRS), which supports the synchronisation of accounting standards globally.

These mandates underscore that risk management cannot be practised effectively in silos. As a result, integrated risk management is becoming a de facto practice for many organisations. It promotes a continuous, proactive and systematic process to understand, manage and communicate risk from an enterprise perspective in a cohesive and consistent manner. It is about supporting strategic decision making that contributes to the achievement of overall objectives. It requires an ongoing assessment of risks at every level and in every sector of the organisation, aggregating these results at the corporate level, communicating them and ensuring adequate monitoring and review. Integrated risk management involves the use of these aggregated results to inform decision-making and business practices within the organisation.

Integrated data management
An integrated approach to risk management has produced a clear convergence between risk and finance regulatory frameworks such as the IFRS. Examples include the accounting reform to move from an incurred loss model to a forward-looking model of provisioning, and the harmonisation of the definition of the regulatory capital components.

The complexity and effort associated with new risk management requirements are steadily increasing. For example, the onset of Basel III is setting off an avalanche of data, results, reports and documentation, which will need to be managed by firms around the world. On top of this comes an intensified level of detail as well as increased frequency and volume of data that needs to be disclosed, thus multiplying the need for resources within institutions who are dedicated to analysing and processing the necessary information.

Being unaware of compounded risks created in multiple data systems, across business units can substantially alter a firm’s risk profile, leaving them exposed to greater market, credit, regulatory and even reputational risk than anticipated. What’s needed is a more accurate understanding of net exposure – not only the risks produced by market dynamics, but also the significant and often hidden risks and offsetting positions inside your operations. In this context the introduction of an integrated risk management concept is generally considered as a major step towards optimised overall risk control.

However, to meet the regulatory challenges of the future with an integrated risk approach, firms have to equip themselves well. Not just with core capital buffer and adapted risk appetite, but particularly with a financial information architecture that creates consistent and precise data, which is managed end-to-end and overcomes the traditional silos.

Optimising risk and performance
The current environment creates an inflection point and challenges financial organisations to look at their latest systems and data from an increasingly holistic point of view. These are what I would refer to as transformative opportunities for global financial institutions to optimise risk and performance across all levels of their organisation.

A single source for the data, if it’s a clean set of data, creates a golden opportunity. With it, you can bring together, in a single application environment, the tools organisations need to manage, measure, and report all financial activities. This includes financial, IAS/IFRS and multi-GAAP accounting, management reporting information, risk and capital management, and compliance.

Aggregated, normalised data is critical, but it is not enough in today’s environment of constant regulatory change and dynamic competitive environment. It needs to be married to the financial service-specific content so that the data output, the information derived from that single source of data, is set in the context of the opportunity or obligation an organisation is trying to address. This critical, actionable intelligence helps organisations make the right performance, risk and business decisions. Quickly.

Transformational opportunity
This is a unique opportunity for financial organisations that creates a strong competitive advantage for organisations. Whether its regulatory reports for a specific country, performance metrics that drive investment and capital allocation, or calculations to ensure compliance with capital requirements of Basel III, firms can manage regulatory obligations more efficiently, manage risk and performance holistically, but most importantly of all, make the best decisions possible in an incredibly dynamic environment.

It is clear that the current high-risk environment provides a unique transformational opportunity for firms with the vision and ambition to grasp it. To take advantage of this opportunity organisations need a partner that can help them. Whether complying with regulatory requirements, addressing a single key risk, or working toward a holistic risk and performance management strategy, more than 15,000 financial services customers worldwide count on the knowledge, technology and consulting services provided by Wolters Kluwer Financial Services for a comprehensive and dynamic view of finance, risk management and compliance.

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