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Risk Management

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Risk Management Is Wall Street's Top Priority for 2009

Poor risk management is at the heart of the current financial crisis. Firms will have to implement new risk management practices and governance to shore up their performance, satisfy regulators and win back investors' trust.

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Why It's Important: Poor risk management practices have been blamed for the credit crisis and ensuing global financial meltdown. Financial institutions and regulators suggest that risk previously was simply reported, rather than managed, and inaccurately assessed, causing banks to post billions of dollars in losses in 2008.

Where the Industry Is Now: "We've been seeing a rush to risk and risk management as a way to get out of this [financial crisis]," says JR Regan, senior executive responsible for global strategy, risk, compliance and security solutions at BearingPoint. Overall there has been an increased focus on enterprise risk management, he adds. "It used to be that financial risk was the granddaddy and everything else wasn't so important. Now firms want to see the sum of all the risks and how that impacts business."

Despite the trend toward enterprise risk management, many companies are still far from achieving it. "Every company should quantify the likelihood of what can go wrong and the risk it is taking," says Philippe Stephan, head of global business development at risk management software provider Sophis. "In practice this is very hard to do, but it is what people should aim for."

Meanwhile Alexandr Sokol, CEO of financial software developer CompatibL, points out that firms have now recognized the importance of credit risk. "Among the different types of risk, market and operational risk were always there, but credit risk seemed a low likely contingency," he says. "But after the events of the last few months it went from hypothetical to something very real, as people lost money when Lehman Brothers defaulted." Top management has also upped its interest in risk, Sokol says. "The key focus is to upgrade risk calculations. It's critical for a business to survive."

As for technology, it has "always been ahead of what people were willing to spend," asserts Sophis' Stephan. "It has been available to address a lot of risks people were not managing, such as OTC pricing. The technology has been around for a number of years. But are people using the tools to manage risk? No."

Focus in 2009: Risk management is expected to be the key industry focus for the next few years, with the spotlight on risk infrastructures. Traditionally disjointed risk and finance functions will be brought together, suggests S. Ramakrishnan, CEO of Reveleus and Mantas products for Oracle Financial Services Software. Firms will benefit from the CFO's strong connection to risk oversight, he adds.

Analysts agree that the biggest challenge firms face in managing risk is at the operating level. Risk managers will be given much more importance by a firm's top managers than in the past, when the pursuit of alpha typically came at the expense of risk mitigation. As such, firms will have to develop adequate risk platforms to provide the CRO and management team with the right information to assess risk across the environment, TABB Group CEO and founder Larry Tabb says. And the CRO and management team will have to have the power to override individual desks or develop a strategy in which the CRO can overlay a hedge without the desk stepping in.

Industry Leaders: Although some analysts question whether its risk management practices differ significantly from other firms', Goldman Sachs was the only bulge-bracket firm to turn a profit amid the 2007 subprime crisis.

Technology Providers: SunGard, Oracle Financial Services, Sophis, Calypso, Misys, OpenLink, Risk Metrics Group and a number of other, smaller players.

Price Tag: For compliance risk, a platform could require investment of more than $1 million to get started, but much larger investments are not uncommon, particularly when the bank has many lines of business. "For market, credit, operational or liquidity risk, the costs rise with the size and degree of sophistication of the bank's business," says Eric Bass, senior managing director, SMART Business Consulting. "A very large, well-known U.S. bank (with retail, wholesale and investment banking businesses) spent over $120 million building a custom credit risk management system."

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio

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