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Cost v risk; a catch 22 situation

At Finexpo last week where I was moderating a panel session, the panel of experts representing Euroclear, LCH.Clearnet, SIS x-clear, LSE and the ECB were asked a question concerning the importance of cost reduction or risk reduction? This question is obviously vitally important to the many financial institutions having to recover from the breakdown of their risk systems and in the current climate of reduced revenue and profits.

It is normal in the finance industry for a freeze to be made on costs and any planned projects will normally have taken a back seat whilst new priorities are established. Surely a leading priority will be to beef up or replace existing risk systems within banks. To build a more secure management capability to realise what risks are being undertaken in financial products, customers, counterparties and markets and to fast track their implementation. All this should be acted upon without waiting for new laws and regulations as business goes on and the need is great.

The answer from the panel was as expected. A reduction in costs and a reduction in risks were considered of equal importance. Here then lies the dichotomy for the market! It is of course unrealistic to think that systems can be changed to help reduce risk without incurring the outlay of more costs and these costs will normally be passed down the chain and guess what, the customer will eventually have to pay. So with the current financial crisis reducing revenue and profits, where will the budgets be found to implement the necessary solutions? So it is a catch 22 situation!

It is therefore worth the government reflecting on how else to assist the finance industry to recover and if more of tax payer's money will have to be assigned to changing systems. At least this looks a worthy cause and a better use of tax payer's money rather than the payment of banking bonuses.  

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Comments: (2)

Iosif Itkin
Iosif Itkin - Exactpro - London 12 February, 2009, 19:05Be the first to give this comment the thumbs up 0 likes

As always, my vote would be for reducing costs or investing into systems targeted at reducing costs. Better risk management can be achieved just by introducing more conservative assumptions into existing models instead of platform redesign.

A Finextra member
A Finextra member 12 February, 2009, 20:01Be the first to give this comment the thumbs up 0 likes

Thank you for your comment

I am not sure simply becoming more conservative will solve the risk problem. The existing risk models and ability to manage risk has fundementally broken down internationally and we are sure to see the regulators beef up and lay down more draconian bussiness and operations risk managment requirements

Gary Wright

Gary Wright

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