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JWG Risk Research Recommends Firms Focus on Getting Workable Risk Datasets in Place

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After two years of scrambling to assemble new regulatory reports, firms now have a brief window of opportunity to rethink the risk information capabilities they need to satisfy both customers and regulators. However, it does not appear that many are taking advantage of the chance to redesign their current risk architectures.

‘Getting risk information right’, a whitepaper released today by JWG, suggests that the box-ticking approach to risk data adopted thus far will prove costly and ineffective in the longer term. The paper concludes that a top-down understanding of the necessary ‘Know Your Exposure’ capabilities is needed to drive infrastructure requirements. The whitepaper is based on interviews with over 100 professionals from 30 financial institutions and many key suppliers, academic institutions, supervisory bodies, standards organisations, law firms and trade bodies, about the priorities for risk management within financial firms.

This, the first in a series of three research reports to be released in Q410, found that many struggle to make sense of the large volumes of complex information buried in the disparate sources where it was created for a variety of purposes:

? 39% indicated that data consistency, accuracy and their ability to aggregate was insufficient to meet the new risk management requirements.

? 89% indicated that they struggle to set the right risk management strategy and allocate financial resources to exposure management.

? It is unclear whether the average spend is sufficient (£3.4 million for a large bank, £117,000 for a small bank or branch).

PJ Di Giammarino, CEO of the regulatory think-tank, JWG, commented: “Over the past two years there has been a great deal of political and regulatory scrutiny of risk management practices across the industry.

“After a flurry of rulemaking, we are now in an important phase where both firms and regulators work out how to embed better risk management capabilities. Perhaps more importantly, the competition for better capital ratios and risk management capabilities looks set to begin in the first quarter of 2011 as future investors examine the firms risk profiles.

“If firms continue to beat about the bush, fulfilling compliance obligations as a tick box exercise, not only are they going to look bad in the eyes of their customers, but the authorities may be forced to impose further, stricter measures.

“Put simply, better risk management is now an increased cost of doing business in financial services and many firms’ operating models are not yet at a level to satisfy regulators and politicians. Given the volume, duration and complexity of the changes needed, there is a worrying gap between the level of resources required and what has been dedicated to date. This is particularly true for the resource-starved management and strategy functions.”

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