**3.3. Data utilization = Efficient technology**

Technology is changing the way people access and exchange information [10]. Information related to a firm's performance is a key success factor [11] and thus technological capability to extract such data can drive competitive advantage. [12].

Data collection and its enrichment are often tedious tasks but critical in any risk analysis phase. Such tasks have often a high manual processing component, which can be an inherent source of errors and productivity constraint. However, through technology and process automation, efficiency levels can significantly improve.

Timely and accurate information ease decision making, and therefore, counting on a well structured information management flow that incorporates advanced technology developments contributes extensively towards minimizing lead times whilst increasing a firm's level of pragmatism and effectiveness to meet its strategic objectives.

Additionally, it is worth referring, not only to the information gathering and processing dimensions, but also to how and when the information is communicated. Only when the information reaches the target recipient it can be utilized and in this context it is relatively obvious that automation can play a key role – let's assume that a piece of information is identified, checked, enriched and worked through; the outcome will only be useful if it reaches the right people at the right time which is achievable if there is for instance an automated process that can instantly distribute the information.

#### **3.4. Risk measurement = Value-at-risk**

The environment in which a firm operates is always subject to an uncertain level of risk, and it has to deal with it. A firm's know-how to measure risk levels is one of its main assets to understand to what extent it is worth to incur a certain risk and can even pre-empt a corporation from bankruptcy.

There are several risk measurement techniques which have been used for long. Some of the most common ones in the banking industry are:


318 Risk Management – Current Issues and Challenges

for risk control.

**Figure 1.** A company's Risk Management strategy should balance its appetite for risk over its measures

Organizational processes are the means that a firm has to achieve its strategic goals. Therefore, firms' corporate policies should be well assembled, known by all and periodically

Technology is changing the way people access and exchange information [10]. Information related to a firm's performance is a key success factor [11] and thus technological capability

Data collection and its enrichment are often tedious tasks but critical in any risk analysis phase. Such tasks have often a high manual processing component, which can be an inherent source of errors and productivity constraint. However, through technology and

Timely and accurate information ease decision making, and therefore, counting on a well structured information management flow that incorporates advanced technology developments contributes extensively towards minimizing lead times whilst increasing a

Additionally, it is worth referring, not only to the information gathering and processing dimensions, but also to how and when the information is communicated. Only when the information reaches the target recipient it can be utilized and in this context it is relatively obvious that automation can play a key role – let's assume that a piece of information is identified, checked, enriched and worked through; the outcome will only be useful if it reaches the right people at the right time which is achievable if there is for instance an

The environment in which a firm operates is always subject to an uncertain level of risk, and it has to deal with it. A firm's know-how to measure risk levels is one of its main assets to

updated not only with industry best practices, but also with the new regulation.

**3.3. Data utilization = Efficient technology** 

to extract such data can drive competitive advantage. [12].

process automation, efficiency levels can significantly improve.

automated process that can instantly distribute the information.

**3.4. Risk measurement = Value-at-risk** 

firm's level of pragmatism and effectiveness to meet its strategic objectives.

The calculation of such measures often needs of many complex mathematical models. Furthermore, in some cases, their implementation at organizations is not easy. Therefore, since the late 1990s, companies have alternatively opted for another method: "Value-at-Risk" (VaR).

VaR calculates the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level [13]. See example in Figure 2.

**Figure 2.** Histogram of daily hypothetic profits and losses over a long-term contract [14]

At this point it is worth highlighting that whilst VaR provides the quantitative perspective, it needs to be complemented by a more qualitative dimension resembling the market changes ("what-if scenarios" or "stress tests").

It is also worth pointing out that despite VaR is used in front of other methods which are perceived less powerful and more complex and difficult to understand, it is also constrained and only valid within a set of assumptions. This is one of the reasons why it is adviced that every VaR model is backtested, validating that the actual results are aligned to the forecasts.

### **3.5. Supervision = Ongoing monitoring**

The level of risk undertaken by a firm derives from its ability to monitor it. High capability to monitor risk helps to optimize the risk taking process. Risk monitoring should not only rely on the automated output of the VaR calculation, but should also be supported by a risk management function that is able to do a correct interpretation of the results. Risk monitoring aids in risk assessment and can result invaluable to senior management when they need to take a decision and they look for advice.

Strengthening Risk Management in the Midst of Downturn Times 321

Excess indebtness

Excess asset valuation

**Figure 3.** Possible root causes of the crisis

Low interest rates

+

Financial innovation

Globalization

+

an adequate management of risk.

So, what are the lessons learned?

to failure? (Figure 4)

*the interest rates …"* 

mistakes [27].

financial institutions' risk management models.

**5. Seven dreadful mistakes in risk management** 

FaultyMarket Behaviour

**5.1. Excess = Aggressive policies in risk lending** 

In order to recover from the crisis, regulators and country heads worldwide have convened on the need of regulatory changes to reform the market risk – Basel III. But restructuring the financial sector jointly with strengthening international regulation policies are necessary but not sufficient conditions to reverse the economic situation. These need to be supported by

Leverage

Faulty Regulation/Supervision

Liquidity Risk underestimation

+

Credit Risk underestimation

+

Consequently, awareness of the fact that a risk culture can constitute a very important safeguard against financial losses and collapse has risen amongst industry players. In particular, Banks and most financial entities have demonstrated particular high interest in the last years on the implementation of appropriate operational and control models aimed at

Beyond looking at the economic crisis from a pessimistic angle, it is undeniable the existence of a brink of light considering the whole context – indeed the financial turmoil of the last years can be seen as an opportunity for change and learning from own or peer

What have been the main mistakes that have led even former leading industry players

 *"… lend, lend, lend … we'll first get hold of the customers and afterwards make a fortune out of* 

At this point it is worth pointing out that although risk monitoring has mainly focused on risk avoidance, there is another dimension: "the upside" or opportunity aspects for risk. This dimension is scarcely looked at, but on the other hand it can, if appropriately managed, derive significant level of profits.

Most frequent means to monitor risk consist on processes, reports, and discussion venues. However to ensure their reliability, these must be backed by a solid function of data management and a usable model.

All in all, monitoring implies tracking and thus, the more effort and time consuming this task requires, the later the relevant information will pop up and the lower the level of responsiveness to potential problems.
