Scarcely picked up by the financial services media, a report published just before Christmas by the Senior Supervisors Group (SSG) has acknowledged that many SIFIs (systemically important financial institutions, if you must be reminded…) have actually made some significant progress recently in improving their internal technology-enabled risk processes.
In ‘Observations on Developments in Risk Appetite Frameworks and IT Infrastructure‘ the SSG (made up of prominent financial regulators from across the world, including the FSA) puts forward a refreshing assessment of the use of IT within major financial services providers to implement a comprehensive risk data infrastructure. The short version is ‘good start, but must do more’, if we are to learn from the financial crisis and the serious harm that the unidentified and unmitigated build up of risk within individual financial institutions can inflict.
However, welcome as this report is, there are still two major concerns that stem from it:
1) How does this report go from being an ‘assessment’ to a serious policy consideration? Policy makers and many corners of the soon-to-be-replaced FSA should take heed from it – it goes quite a way to highlighting the importance of IT to the end result of reducing risk within financial institutions. As the FSA must have played some part in drafting this report – why does the role of technology remain off its and HM Treasury’s radar as such crucial reform is developed? (Should I read into the fact that I had to find a copy of this report on the French Central Bank’s website as the one on the FSA’s website doesnt work?)
2) As has been the case in the majority of consultations, statements and papers emanating from regulatory authorities and policy makers in recent months, a significant piece of the jigsaw has been overlooked. The SSG is right to focus upon the shortcomings of individual institutions in gathering data from across their businesses so that risk can be calculated, but what of systemic risk across the wider financial system? There remains a key challenge, as yet unaddressed and largely dismissed in the ongoing reform of the financial system – that regulators also need access to this information from all SIFIs so that they can monitor and, where necessary, act to mitigate the build up of systemic risk across the whole of the financial system. The challenge here is that information standards and formats differ from financial institution to institution and finding a means of standardising this information (and facilitating its sharing and analysis by regulators) is a complex and time consuming task – one that has not really been considered by the UK’s regulatory authorities so far. In short, the plumbing of the financial system needs some serious repair work.
So, promising and informative as the SSG’s paper is, it needs to have a tangible impact upon current deliberations, and it needs to go further.