In line with the marked increase in risk related regulation this year, many financial institutions have been compelled to step up their efforts in the space in order to be able to cope with the deluge of new requirements. Speaking at last week’s FS Club in London, Ed Duncan, global head of regulatory liaison and capital management at Barclays Capital, noted that his own firm has increased its risk resources over the last 18 months in order to deal with the challenges, which include pulling together the relevant risk and reference data from across vertical silos and legacy infrastructure.
Duncan joined BarCap back in December, with specific responsibility for market risk regulation and capital management, when he left his role as head of risk and reporting at the International Swaps and Derivatives Association (ISDA) in London. He also previously worked for Goldman Sachs, prior to his appointment at ISDA in 2003.
“There has been increased investment in the risk management function at BarCap – I am now part of a growing team that didn’t exist 18 months ago,” explained Duncan last week. “A lot of banks are establishing new teams within the various risk disciplines in order to manage effectively and more successfully the barrage of requests from regulators on a daily basis.”
This backs up the comments made by Mizuho International’s director of risk management Simon Tweddle earlier this year, who indicated that ad hoc regulatory requests for data are putting significant pressure on firms. Risk and regulation have, in turn, caused data management to rise up the priority list within institutions, as these firms seek to ensure the correct data is being provided out to the regulators and the market at large.
Duncan’s function sits within the market risk area and he is currently responsible for BarCap’s interface with UK and US regulators, which effectively puts him in the front line with regards to dealing with the intense regulatory scrutiny that has characterised the post-crisis environment. He notes, however, that this scrutiny has been beneficial overall for the risk function because CEOs are now much more willing to sign off budget approval for projects to improve the performance of the function overall.
“I have the luxury of all of my projects being prioritised for me – the business recognises that this work has to be done to meet compliance requirements. In the past this was not how risk projects were prioritised, but the crisis has resulted in a massive regulatory reaction and put a different slant on proceedings,” he told attendees to the FS Club.
BarCap is currently examining its planned approach to one of the first sets of risk related reporting requirements to come out of the G20 talks last year. “We are dealing with the first set of proposed reforms from G20 that are not grabbing headlines but involve materially higher capital charges covering trading activity that currently need to be implemented in the UK by January 2011, although there remains some uncertainty around this date,” explained Duncan.
He added that from an internal perspective there is also a lot of focus on risk numbers and a lot of work goes into managing those numbers, all of which comes down to having in place a sufficiently robust data architecture. “All functions within the bank are focused on risk weighted assets (RWAs),” he continued.
In order to get a better handle on risk data such as this, firms need to first understand the data implications of the new regulations coming into force, explained PJ Di Giammarino, CEO of think tank JWG. He recommended that firms prioritise the work by examining the challenges from a customer, regulatory and shareholder perspective. “What is changing comes down to three things: the treatment of capital; enhanced practices around risk management such as concentration risk and stress testing; and managing liquidity,” he said. “All of this asks us to get out of our silos and correct some to the poor quality systems and controls we have had in the past.”
Di Giammarino recommended a number of areas of focus in order to adequately manage risk, including examining current resources and thinking strategically about how to leverage these. “There are generally three big pain points in tackling risk management changes: how in control of your systems and controls you are; your ability to track data for reporting purposes; and how this data gets reported to regulators,” he said.
Other panellists agreed that a priority list needs to be drawn up before any action can be taken and that further clarity is needed from regulators about the details of change before this list can be fully realised. An audience member also noted that regulators might not even be able to use all of the data they are collecting from firms, thus rendering some of these efforts pointless.
However, audience members agreed the motion that penalties will face those that don’t tackle their risk management challenges in the long term. Regulators are watching, after all.