Financial institutions reassess risk probabilities

Financial institutions are now increasingly concerned with the likelihood of certain risks following the World Trade Center terrorist attacks, Enron’s near-collapse and Argentina’s debt problems, the US Securities Industry Association (SIA) said in a research report.

The report states that the nature of risks confronting financial institutions has not changed markedly, but that there is increasing need for them to extend their scenario testing and obtain real-time data for risk models. It highlighted the need for financial institutions to integrate assessments of liquidity, market and credit risk, and also said more focus was needed on operational risk and geographical support systems and procedures.

The report has emerged through ongoing discussions at the SIA risk management committee, whose participants are heads of risk management at major financial institutions.

Frank Fernandez, senior vice-president, chief economist and director of research at the SIA, told RiskNews that despite the increasing interdependency of global financial markets, these institutions had performed well under the pressures of recent crises due to lessons learnt from the Long-Term Capital Management, Asian and Russian crises of recent years.

Fernandez said events this year have prompted risk managers to think further about event clusters and the importance of stress testing and value-at-risk calculations. Firms are still dealing with known risks, but there is increasing recognition that the probability assigned to certain outcomes needs to be modified, he said.

He added that changes in the underlying parameters of risk models, and an increasing demand for real-time assessment data, were gaining prominence. "There is a need for current data. In the meantime, firms are running multiple models side-by-side, but same day/next day data has been long in coming, and achieving seamless real-time data is the real task for the future," Fernandez said.