Risk Management special report

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Once Bitten...

One would hope that the maxim, "Once bitten, twice shy," could be used to appropriately describe the financial services industry in a post-financial-crisis dispensation, characterized by enlightenment, prudence, and dare I say it, even a modicum of humility. Only time will tell.

In many respects, risk management practices across the financial services industry were a ticking time bomb leading up to the financial crisis of 2008. While all market participants had at least some degree of risk management framework in place, what transpired in the wake of Bear Stearns' and Lehman Brothers' failures-the two highest profile bank collapses that contributed in no small way to the global credit crisis and the chain of financial and psychological events that ultimately dragged the world's economy to the very brink of complete meltdown-was, once the dust had settled, a return to the risk management drawing board where any and all financial services firms scrutinized their processes and procedures, and questioned their assumptions and models to ensure that if and when another similar event occurred, they would be better prepared to deal with the contagion.

Leading up to the financial crisis, all but the most sophisticated risk management practices were backward-looking and were invariably run on an overnight basis, given the complexity of the calculations and the computing resources needed to run measures such as Monte Carlo simulations and stress-tests. Needless to say, real-time risk management or even intra-day risk snapshots, generating enterprise-wide risk "maps," and managing counterparty credit risk on an ongoing basis during the course of the trading day, were, until recently, pipe dreams for all but the very largest sell-side firms with the deepest budgetary pockets. And, while those scenarios might still ring true for some of the industry's laggards, it's fair to say that the 2008 clarion has been well and truly heeded.

In the virtual roundtable section of this special report, which starts on page four, participants look at the extent to which buy-side and sell-side firms have embraced the move to managing their various exposures on a real-time basis; the technical, operational, and, in certain cases, the cultural challenges that need to be addressed before firms are in a position to monitor their risk on a real-time or intra-day basis; and the pivotal role that data plays in their risk management endeavors, along with the associated challenges around ensuring its cleanliness, reliability, uniformity, and the ease with which it can be shared across the enterprise. Only once these questions have been satisfied can the real-time risk management label be considered meaningful.

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