Drowning in Data? The threat to effective Risk Management

Are banks facing sink or swim when it comes to data?

Swimming or drowning? When it comes to data for banks, it can seem like a very fine line indeed.

Half of bank execs polled by the Economist Intelligence Unit (EIU) say a lack of data is the biggest barrier to better risk management. Rather than a shortage of data, it seems many are struggling to properly harvest, collate, analyse and apply it.

According to the study, banks see liquidity and credit risk as presenting the biggest challenges. They also view these two types of risk as offering the biggest potential for improvement.

Why such a focus on these two areas? As the EIU states, the thirst for profits “thins capitalisation and leaves little margin for error”. In particular, short-term credit is a major area for concern and is being tackled in the US at least with the Fed’s new capital requirements for the country’s eight G-SIBs.

Ultimately, it goes to the heart of what banks do. “The common feature of the financial services industry—banks, brokerage firms, hedge funds—is that there is a small amount of equity and a large amount of financing supporting the firm’s assets,” says Robert Chersi, a professor of finance at Pace University in New York.

Risk management is rising in prominence, with four in five banks routinely providing comprehensive reports on the bank’s risk profile to senior executives.

“The types of things that are most commonly requested are the Volcker metric-related variables that show our liquidity, balances, risk ratios and exposures,” says Wells Fargo chief data officer, Charles Thomas.

However, they may not have access to the right big data tools to be effective.

Four in ten respondents currently have the ability to integrate, manipulate and query big data when creating risk profiles. Almost half (47 per cent) plan to invest in these areas in the next three years.

The regional split is also interesting. European banks are more worried about liquidity and credit risks than institutions elsewhere.

They’re also much more likely to worry about compliance risk - 25 per cent of European banks versus just eight per cent in Asia-Pacific, for example. Operational risks vary too, with North American banks twice as likely to worry about this as their European counterparts.

Foreign investment risk concerns were highest in North America. Unsurprisingly perhaps given the current squeeze, market risks worry banks in emerging markets more than elsewhere. Certainly when it comes to risk management there are particular local concerns for banks.