Intelligent IT solutions point the way out of the crisis
The financial crisis is bringing banks to their knees – experts call for more efficient risk management
Very few banks have their credit risks under control, can get a grip on market risks, or are taking steps to prevent operational risks. In the meantime, not only experts at the Bundesanstalt für Finanzdienstleistungsaufsicht (Germany’s Federal Financial Supervisory Authority), but banks as well are calling for stricter risk management. A prerequisite for this is a powerful IT infrastructure. One thing became clear during a CeBIT press conference with the bank expert Professor Hans-Peter Burghof and the GFT CEO, Ulrich Dietz: banks that emerge from such a crisis as winners have implemented a healthy mix of standard software and customized IT solutions.
Stuttgart/Hanover, 4 March 2009 – Efficient risk management is not possible without a qualified data platform, yet very few banks have such an informational basis. They may have access to a great deal of data, but it is not always of the right type. “The financial crisis has not been caused by too much quality risk management”, explained the bank expert Professor Hans-Peter Burghof, who holds the Chair in Banking and Financial Services at the University of Hohenheim.
Quality instead of Quantity
“There is a need for improvement, especially with regard to the quality of the data. This must be up-to-date and fully reflect the business processes in order for it to be used as a solid basis for calculating the operational value at risk,” says Ulrich Dietz, Chief Executive Officer of the international IT firm GFT Technologies AG.
“However, that alone is not enough. The qualifications of bank managers who analyse the data are also being put to the test,” says Prof. Burghof. “They must be aware of the options offered by modern quantitative risk management, but also of its limits. Blind faith in the numbers is just as dangerous in this context as ignorance of measurable risks.”
Efficient IT solutions alleviate risks
The symbiosis of both requirements can be found in a powerful IT infrastructure. Even the best bankers, who make use of their experience, competence and sixth sense when anticipating risks, need a reliable IT infrastructure that effectively supports them in their work.
A healthy mix of standard software and individual solutions is required, such as those offered by GFT. The more individual a problem is – and every bank has its own special risks – the more suitable individual solutions are for controlling processes. Many banks therefore develop their own tools for providing IT support.
Good risk management systems work preventively on multiple levels
“Classic early warning systems can only recognize crises that are present in the existing data”, notes Professor Burghof. “However, those who want to equip themselves to deal with future risks must use foresight.”
Innovative IT solutions are better than classic early warning systems in many ways. “Risk management systems must work preventively in order to be effective“, emphasized Ulrich Dietz, CEO of GFT. “This means risk controls must also function correctly, in addition to the tools for performing risk analyses and risk definitions.” This is something that is particularly difficult to implement by using standard systems.
“In order to perform a complete risk assessment for a bank, a holistic analysis is essential“, emphasized Ulrich Dietz. “The objective of every bank should therefore be the establishment of an integrative risk management system, which consolidates various subsystems for the management of different risks – in other words, financial risks, process risks, market risks or geopolitical risks. Ideally, banks should have a real-time risk dashboard, which allows them to intervene whenever necessary. It is thus particularly important that the risk analysis processes, definitions and control mechanisms are integrated into daily business and flexible enough to allow them to be adapted easily to changing conditions.”
Costs savings remain necessary
“Regulatory requirements are increasing and risk management systems need to be considerably improved. However, despite these necessary investments, existing costs must still be reduced. These are the challenges currently facing IT managers“, explains Ulrich Dietz, CEO of GFT.
“It sounds like a Herculean task: how can an IT budget be reduced by 50%, when 70% of the costs are already being utilized for operating the existing systems?” As an internationally active entrepreneur, Ulrich Dietz follows two main approaches in order to help IT managers free up budget funds for strategic projects: reducing maintenance costs through outsourcing and lowering development costs through near and offshore projects.
“Despite the benefits provided by the different salary levels in the individual countries, the work must remain feasible”, explains GFT CEO Ulrich Dietz. “For example, the amount of standard software used in a specific project should increase the further away a subsidiary is. However, as soon as a project requires close cooperation and an intensive amount of support, regional and mental proximity is advisable, as is the case with our European subsidiaries.”
As an IT company with a focus on clients in the financial services sector, GFT has successfully supported and carried out numerous projects related to the alignment of internal rating processes with the Basel II standard. The company supports its clients in management of credit risks, develops customised solutions for managing market risks and helps actively control operative risks.
Prof. Burghof holds the Chair in Banking and Financial Services at the University of Hohenheim and is the vice-chancellor there for Internationalisation and Business Contacts at. In October 2008, together with other Hohenheim professors, he issued the appeal "Let's not provoke an economic crisis".