Real-time risk management is the holy grail for many financial institutions.
The reality: the majority of banks cannot calculate the true risk of new deals to their business intraday because they continue to rely on stale inaccurate data.
That’s the conclusion of a survey of about two dozen senior risk managers at global banks released on Tuesday by Quartet FS, a Jersey City, NJ based analytics and business intelligence software firm. The banks studied included HSBC, Natixis, WestLLB, NAB and Societe Generale.
Real-time risk analysis allows firms to price their exposure into their new trades and achieve a competitive edge. But traditional risk management systems can’t offer that because they are unable to analyze huge amounts of data quickly.
Quartet FS’ survey entitled “Risk in Global Banking” showed that 53 percent of respondents were happy to have overnight calculations for all market risk deals but 50 percent wanted market risk calculations for each new deal to be conducted in under 10 seconds. However, only 20 percent can conduct market risk calculations per new deal in less than 10 seconds and 40 percent are still only able to conduct the calculations overnight. The remainder make their calculations between 10 minutes and an hour.
The need for real-time metrics is also important for measuring credit risk; a third of the banks said they ideally would like calculations to be completed under 10 seconds when it comes to measuring potential future exposure (PFE). They want the same fast timeframe to calculate credit valuation adjustment (CVA).
The reality: only 15 percent of respondents can calculate the PFE for reach new deal in under ten seconds and 55 percent can do it overnight. When it came to CVA, none of the respondents could do so in under 10 seconds and 79 percent can do so overnight.
CVA is one of the most popular means of measuring counterparty risk or the expected financial loss arising from the future default of a counterparty. CVA puts a price on counterparty credit risk that can charged to trading desks so they can accurately price their transactions in over-the-counter derivatives which are uncollateralized. Many over-the-counter derivative deals, particularly with corporations remain uncollateralized and processed bilaterally.
PFE calculates the maximum exposure of a trade at any point into the future while CVA builds on that exposure. CVA includes the effects of counterparty netting agreements; the probably that a party will default within a set of future time periods and if they were to default how much of the payments one could expect to recover.