Evolution of Enterprise Risk (Review Report)

This report provides detailed analysis into vendors specializing in a specific product/solution. Positioning analysis and a detailed product assessment sentiment, impact and technology are covered.



Report Highlights
The sub prime crisis has caused a fresh look to be taken at credit risk policies and practises. Organisations are revaluating the impact of a series of regulatory changes and endeavouring to leverage investment to enable a truly enterprise wide approach to risk management. The discipline of operational risk is beginning to mature.


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Overview 1
Catalyst 1
Summary 1
Methodology 1
Executive Summary 2
Introduction 2
The Evolution of Enterprise Risk Management (Market Focus) 2
Enterprise Risk Management objectives and imperatives(Strategy Focus) 2
Technology strategies in Enterprise Risk Management (Technology Focus) 3
Key enterprise risk management investment areas (Databook) 3
IT spending opportunities in retail banking and financial markets (Databook) 3
The Evolution of Enterprise Risk Management (Market Focus) 7
Summary 7
Analysis 7
Introduction 7
Credit risk failures can precipitate liquidity risk, so model assumptions need to be dynamic 8
Sub-prime crisis background 8
Credit risk challenges: leverage and modeling 9
Credit risk challenges: ratings agencies 9
Credit risk challenges: aggregation and integration 10
Credit risk challenges: knock-on effects 10
Implications for credit risk assessment and pricing 10
Changes to ratings agency policy and practice 11
Modeling 11
Over-reliance on modeling and silo structures prevented the successful aggregation of portfolio risk profiles. 11
Modeling shortfalls 11
Liquidity risk 12
While credit and market risk have long driven investment, operational risk is still evolving 12
ORM process 12
Communication is key. 13
The growing convergence between IT and risk is being driven by regulatory change 14
Compliance as opportunity. 14
MiFID and RegNMS update 14
Conclusion 16
Enterprise Risk Management objectives and imperatives(Strategy Focus) 17
Summary 17
Analysis 17
Introduction 17
Information risk management is the foundation of successful operational risk frameworks. 17
Fraud/AML detection and prevention an important entry point to ORM 18
Risk based product pricing must reflect all risks to ensure the most efficient use of capital. 19
Risk based asset pricing. 19
Efficient cost of capital: economic capital modeling 21
Performance management 22
Operational risk management (ORM) is maturing from historically tactical solutions 23
Considerations in establishing an ORM framework 24
Operational risk loss databases. 25
Conclusion 26
Bank IT strategies in Enterprise Risk Management (Technology Focus) 27
Summary 27
Analysis 27
Introduction 27
Successful solutions will be those able to deliver the right metrics to the right people in the right time. 28
Automation opportunities continue to be found in credit risk 28
Automation and its limited role in operational risk to date 30
Flexibility is the key feature of operational risk solutions 30
Industrializing computing scale by grid computing 31
In operational risk, outsourcing opportunities at this point are limited. 32
Outsourcing of regulatory compliance can bring benefits but strict governance is required 33
External loss databases 33
Vendor opportunity exists in flexible, customizable solutions 33
Need for economic capital efficiency is driving development in calculation engines and loss data utilization. 34
Economic capital will be at the heart of overall risk management strategy in financial services 34
Operational risk capital calculation methodologies are being refined 35
Process review key to ongoing refinement 36
Vendor opportunities 37
Conclusion 38
Key enterprise risk management investment areas (Databook) 39
Introduction 39
Risk spending is expected to remain largely unaffected due to operational and credit risk drivers. 39
Operational risk will continue to grow at a faster pace in the search for performance based efficiencies 41
IT spending opportunities in retail banking and financial markets (Databook) 43
Introduction 43
Credit risk spending will lift in 2009 as further integration within enterprise risk becomes possible. 43
Firms will seek to leverage prior investment internally in the drive to find efficiencies. 45
APPENDIX 47
Definitions 47
Extended methodology 47
Further reading 47
Ask the analyst 47
Datamonitor consulting 48
Disclaimer 48

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Table 1: Risk management technology expenditure by region 40
Table 2: Risk management technology expenditure by risk type 42
Table 3: Risk management technology expenditure by sector 44
Table 4: Risk management technology expenditure by source 46


Figure 1: Enterprise risk management map 8
Figure 2: The levels of ORM 13
Figure 3: Investment drivers 15
Figure 4: Barriers to integration 19
Figure 5: Types of capital 21
Figure 6: Risk based performance measurement 22
Figure 7: Meeting Basel II AMA requirements 23
Figure 8: Scenario analysis a powerful tool for ERM implementation 24
Figure 9: Reporting and compliance is driving investment 26
Figure 10: Encouragingly upgrading of risk frameworks is already underway 27
Figure 11: Complexity of data types means progress in operational risk will be evolutionary 31
Figure 12: The many impacts of economic capital 34
Figure 13: Risk management technology expenditure by region 39
Figure 14: Risk management technology expenditure by risk type 41
Figure 15: Risk management technology expenditure by sector 43
Figure 16: Risk management expenditure by source 45

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