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The Future of Finance

Risk Management, Compliance and the Human Touch

Risk management is at the heart of the modern banking operation. Financial institutions (FIs) are seeking increasingly sophisticated new tools to enable them to improve transparency across the business and manage their exposure to risk more effectively.  Banking and securities regulators have made it clear that they will focus strongly on risk and compliance functions during inspections and in determining capital requirements; and this focus will not go away. Risk management can no longer be reactive and retrospective; risk managers need to be able to operate proactively.

In the light of this, FIs are collectively spending billions on increasingly sophisticated software, as their current risk systems struggle to keep up with the demands being placed on them. Indeed, it sometimes seems like a very expensive game of 'catch-up'.

And it's not just the FIs but also suppliers like Misys who are investing in this area. Surely this means that market and company issues caused by inadequate risk management and irresponsible trading can one day be eradicated through the services of the 'new age' of risk and compliance systems.

Well,  perhaps not totally. 

The banks cited in recent allegations of LIBOR manipulation are among the largest in the world and must have invested very heavily in the best risk management systems available. Unfortunately, no matter how much they spend, there is one type of risk they can't hope to eliminate completely ;  the 'human' element.

In this particular instance, with LIBOR reporting basically an 'honour' system for the banks involved (albeit tracked for unusual movements) it was always going to be open to potential manipulation by individuals within contributing firms, seeking personal or corporate advantage.

The 'human touch' cannot be removed from business. FIs are run by people. Systems can go a long way in helping to minimise risk across the enterprise, but how do you design a system that can prevent the calling in of a favour?

 This post was written by Sue Dobson.

Posted at 15:05

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