The need for a strategic approach to risk


Institutions cannot continue to adopt knee-jerk strategies to each regulatory requirement, otherwise they will merely be building ‘compliance legacy’. This was already becoming clear ahead of the financial crisis, partly because of the sheer number and scale of those regulatory requirements, as well as the overlap in much of what was being required. Basel II and now Basel III, in particular, has an impact on more or less every part of the business. Now the regulators themselves are looking for a well-planned and robust approach, so too the business itself. In particular, organisations that have looked into the


strategic options have tended to conclude that the overlap and synergies are not only for risk management but also for finance/accounting requirements. Two forms of activity that were previously separate are coming together, bringing the need to break down silo systems and silo organisational structures.


In cost terms, Gartner pronounced: ‘Companies that maintain individual initiatives for each regulatory challenge they face will spend 150 per cent more on compliance and ten times more on IT compliance solutions than those that take a proactive approach.’ In Gartner-speak, this statement was assigned a ‘0.9 probability’ rating. However, by definition, the proactive approach brings


larger, more complex projects. They touch many areas of a bank, including transactional systems, general and sub- ledgers, all data repositories, and departments and disciplines such as liquidity management. They bring a need for often heavy investment in IT infrastructure, a similarly high spend on third party expertise, senior staff recruitment, and a redefining of internal roles and responsibilities for existing staff. There is an added dimension to the complexity within diverse banking groups which span multiple countries and jurisdictions. For instance, an international bank that does business in the US still has to conform with SOX. Many banks are the sum of multiple parts, brought together through mergers and acquisitions. This may well mean a greater internal


challenge if the coming together of businesses, systems and processes is on-going, particularly where additional M&A activity takes place during the course of the projects. The benefits of a strategic approach can be seen within banks that have addressed previous compliance requirements with one eye on future requirements. For instance, when NordLB Luxembourg was seeking a solution towards the end of 2002 for IFRS, it also took into consideration the emerging requirements for Basel II, so that synergies could be exploited for ratings and valuations. One future-proofing decision in particular was that the project should be extended to support the real-time import of data into the repository being built for IFRS. Christian Veit, head of finance at the bank, said: ‘The fundamental basis for the Basel II project has already been established with the IFRS solution.’ The new regulatory environment which has emerged from the crisis makes a strategic approach even more essential, with significant infrastructure implications. In fact, this was stated as much within the UK FSA’s liquidity risk management proposals. It estimated the cost of compliance for the sector as a whole at €60-213 million, with this broken down for large firms as €6.4-9.6 million for implementation and €1.06-2.14 million for annual ongoing costs. Technology special interest group, JWG, which describes itself as a think-tank for EU-driven IT change in financial services, flagged three major changes as a result of the proposals:


First, firms would need to be able to collate on an ‘on- demand’ basis a wide range of granular data relevant to all assets, liabilities, contingent assets/liabilities, derivatives positions and other off-balance sheet activities. Second, firms must be able to apply extensive stress testing at three levels that are defined by the regulators, with these approved by senior management. Third,


firms must be able to document their


full


compliance with the new standards, including processes, systems and controls. The focus would be for firms to ‘test


Risk Management Systems & Suppliers Report | www.ibsintelligence.com 165


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