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The Changing Face Of Credit-Risk IT

A system that measures, monitors, and manages is no longer a Wall Street extravagance, but an industry essential.

Fortnightly Magazine - August 2006

in portfolios and exposures.

According to the GARP credit-risk survey, not every company has a tight rein on their sometimes bucking-bronco-like books. In the survey, risk managers and survey respondents were asked how quickly the risk staff would become aware that a book credit limit had been breached. Only 11 percent said in real time, with the rest answering intra-day (25 percent), overnight (35 percent) and longer then overnight (29 percent). As for finding breaches in trading book limits, survey respondents said about 22 percent find them in real time, 34 percent in intra-day, 29 percent overnight, and 14 percent longer than overnight.

Expensive and unwelcome breaches in user-defined roles and counterparty limits can be avoided through ironclad segregation of duties and limits, immediate threshold-based “knockout” alerts, and seamless risk management integration.

Business & System Integration: Where the Rubber Meets the Road

No doubt the implementation process of any risk-analysis system can be demanding. But with expert help, the journey through the process can prove richly rewarding, adding enormous fiscal value through reduced losses and improved adaptability to lightning-fast market moves. A best-of-breed system also helps reduce the internal-control difficulties inherent in manual processes, while lowering staff costs. Proper implementation of an automated solution provides both tangible and intangible benefits. Many organizations now are realizing that automated solutions are the most effective remedy for internal control challenges, but they have a limited number of internal business experts who have little or no time to focus on system integration or implementation projects.

While the benefits are compelling, the climb can be daunting. Internal red-tape, failed attempts to solve similar problems in the past, allergic reactions to multi-million-dollar/multi-year projects, poor executive sponsorship, dynamic market conditions, achieving “SOX stability,” and unprecedented volatility in the energy markets all create institutional inertia. However, there is no doubt that in this case the view is worth the climb. The difficulty today is that few companies are staffed with the right resources to work on such projects, or the key resources to make this effort a success are helping with other “hair-on-fire” issues. Selection of the right external resources and software vendors is critical to achieving success, so choose wisely.

In the end, the energy sector is rife with low-quality credit scores, counterparty contract default, and bankruptcies. The energy sector has felt enough fiscal pain in recent years to take a long, hard look at its exposures and overall risk portfolio, particularly in operations and market risk. Yet credit risk clearly is the overlooked stepchild of risk management, especially in the energy industry. Today’s ahead-of-the-curve credit risk technology is ready to take its long overdue position as an indispensable revenue-protecting risk management tool in handling energy’s challenges.

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