Risk/reward

Standard & Poor’s David Samuels exclusively answers FST’s questions about managing risk in the shadow of a global financial meltdown.

“With the right risk management systems, processes and people in place, organisations are in a far better positions to identify, mitigate and manage risk”
-David Samuels, Standard & Poor

As one of the world’s leading providers of financial market intelligence, Standard & Poor’s is well positioned to answer the questions of financial professionals in the current economic climate. Fixed Income Risk Management Services (FIRMS) is a unit within Standard & Poor’s focused on providing financial professionals with a wide range of analytic insight, data and risk management solutions to help manage credit risk. Under the FIRMS umbrella is the Risk Solutions business, which provides comprehensive risk management solutions that leverage Standard & Poor’s intellectual capital to help financial professionals gain competitive edge through improved risk-based decision making.

It is here that we meet David Samuels, the global head of Risk Solutions. Mr. Samuels begins by explaining the primary goal of his group, which is to offer risk management solutions to help clients gain a sustainable, competitive advantage.  As someone who has been in financial services for more than 20 years, he understands that it is a tough mission, given the current state of the market. 

Risk Solutions has a global presence. Currently EMEA is the largest region but the group is experiencing steady growth elsewhere around the world.

FST. What impact is the ongoing market volatility having on the business of managing risk?
David Samuels. As you can imagine, the current state of the markets and their ongoing volatility is having quite a dramatic impact on our clients. They recognisze the need for greater transparency in their risk management processes, as well as the need for implementing overall risk management frameworks within their organiszations.

We are seeing a widening interest on the part of senior executives for improved internal risk management capabilities. Clearly, these executives recognisze that they need to have a greater understanding about the risks affecting their businesses. Not only are they placing increased emphasis on having the right systems for assessing risk, but also on the right processes and the right people to evaluate risk across their entire business.

This trend represents a marked departure from the siloed approach of the past, where credit risk, market risk and operational risk were viewed separately within an organiszation. What we're seeing now is a real push toward ensuring that there is an integrated and common framework across the entire organiszation when it comes to evaluating risk.

FST. Is the increased uncertainty presenting particular challenges?
DS. One of the important changes that we're seeing as a result of the current uncertainty is that organiszations appear to be moving rapidly to better understand and manage the risks associated with sector and geographic concentrations across their businesses. In turn, this change raises obvious questions within an organiszation, such as, where should the analysis start? This is the critical question Standard & Poor’s Risk Solutions helps our clients answer.
 
In Europe, where you have very disparate, individual countries in relatively close proximity, and lots of cross-border financial activity going on, issues like correlation risk become even more important. That’s why it’s critical that European firms understand how the correlations between different market sectors impact each other.

In addition, how these sectors interact becomes extremely important in uncertain times and here the goal is to determine the impact when highly correlated sectors, geographies and risk types all potentially go wrong at the same time.

FST. Do you think then that the failings and the failures related to the financial crisis we are currently experiencing will change how we approach risk in the future?
DS. I believe that many organizsaations are already mobiliszing to implement what we refer to as ‘“best practice risk management’.” Such organizsations recognisze that they need to have the right systems, processes and people in place to analyzse and manage a wide range of risk in a proactive fashion.

For Europe, some of the incentive for better risk management is associated with the demands of Basel II, but it's not the only driver. Not all best practices can be derived from a regulatory framework; some are derived from just looking at what other institutions have done and profited from. This is why we're seeing a significant increase among financial institutions and investors starting to implement comprehensive workflow-based solutions such as our Credit Risk Evaluator product. Credit Risk Evaluator ensures a complete and accurate picture of an organiszation’s risk profile across the organiszation.

FST. And, of course, in the wake of the financial meltdown, many have suggested that it was impossible to see it coming. Do you believe this to be true, or were there signs of what was to come?
DS. Our feeling is that no one system and process can predict everything. However, with the right risk management systems, processes and people in place, organiszations are in a far better position to identify, mitigate and manage risk. Proper risk management systems can help organiszations not only quantify the risk, but turn risk into competitive and financial benefits. It comes back to our overall mission within the business and being focused on our clients. Not simply to understand what the risks are, but how to turn those risks into an advantage for the business. There is a fundamental shift going on in the industry right now. Organiszations are empowering themselves and realiszing that they can move from a reactive risk management process to a proactive one.

FST. Do you see any significant trends in risk over the coming year? How do you predict the financial industry will continue to respond to the ongoing difficulties?
DS. We see several significant trends that are driving our clients and indeed the direction of our business.

The first trend is actually a continuation of one I have already mentioned. We believe that senior management will continue to expand its role in risk assessment and risk management and require their organiszations to broaden, improve and integrate this capability across the entire organizationcompany.

Another trend will be the increased focus on risk management as a step in business improvement, not just control. History suggests that you have to take risks in order to grow your market. From this we can deduce that organiszations that have effective risk management programmes should be in the best position to turn controlled risk into competitive advantage. We are already seeing many organiszations come to us for help in putting in place industry best practices to avoid any number of the pitfalls that other organiszations are running into.

The next level
If looked at as more than just regulation, the risk management requirements under Basel II can offer a financial firm many advantages beyond meeting compliance demands. Today of course, many organiszations are focused on complying with Basel II, especially in EMEA and other regions where Basel II is mandatory. However, we often advise our clients to look at Basel II as an opportunity to move the needle of their internal risk management capabilities even farther and not stop with satisfying the basic requirements of the convention.
 
Human nature being what it is, many organizations tend to look at what they have to do to comply with regulatory requirements and say, ‘okay, this is the minimum I need to do to keep the regulators happy’. We counsel our clients to think differently and to see the money they are investing in their organizations for Basel II as a reason to go even farther to run their businesses better. We believe what firms should be saying is, ‘let us leverage the regulatory investment and pick additional best practices that we can put in place to turn the overall initiative into a competitive advantage’.

In this manner, organiszations will see regulatory controls as not always being about constraining their activities, but about providing a better framework for using risk management to drive controlled growth. This is what organiszations of all sizes should be doing with their risk management investments to take business to the next level.

This article first appeared in FST magazine, European edition: www.fsteurope.com/article/Issue-10/Risk-AND-Security/Risk/Reward.