Financial services firms need to make substantial and sustained investments in IT infrastructure if they are to overcome severe underlying weaknesses in their risk management capabilities, according to a report by financial regulatory agencies.
The Senior Supervisors Group (SSG) that comprises watchdogs from seven countries (United States, Canada, France, Germany, Japan, Switzerland, United Kingdom) says that underlying weaknesses in governance, incentive structures, information technology infrastructure and internal controls require substantial work to address.
The SSG report evaluates how weaknesses in risk management and internal controls contributed to industry distress during the financial crisis. Among other failings, it concludes that inadequate and often fragmented technological infrastructures at most firms hindered effective risk identification and measurement.
One challenge to improving risk management systems has been poor integration resulting from multiple mergers and acquisitions, says the report. One firm suggested that acquisitions over the years have produced an environment in which static data are largely disaggregated. Another firm echoed this view, reporting that certain products and lines of business have not been included in data aggregation and analysis processes. A third firm reported that having two systems for the same business results in duplication of processes.
Almost all struggled to process record-high volumes of product transactions during periods of market stress.
Many firms cited large-scale IT projects planned or under way to address these infrastructure and aggregation deficiencies.
Supervisors remain sceptical, however, noting that firms need to reexamine the priority they have traditionally given to revenue-generating businesses over reporting and control functions.
"In the past, many such projects have fallen behind schedule because of inadequate investment and resources," states the report. "In the current environment, these projects will require a significant dedication of funds, sponsorship, and commitment from the board and senior management during challenging economic times to ensure that technology platforms are constructed to handle unexpected spikes in volumes and to effectively produce aggregated data and appropriate management information for credit, liquidity, market, and other risk metrics.
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