Unified

In an exclusive interview with Dr Juerg Winter, CEO of IRIS integrated risk management AG, we discover how unifying financial analysis for financial institutions could be the most profitable investment in the business infrastructure today.

FST. What would you say are the biggest challenges financial institutions face today when it comes to carrying out effective financial analysis?

JW. Financial analysis is a growing concern on several levels for most financial institutions. On the one hand, they must satisfy the rising customer appetite for new and often more complex products, while on the other hand also satisfying the increasing internal and external requirements for more transparency of ALM, market and credit risk, improvement in risk adjusted pricing, the regulatory reporting requirements, Basel II, IFRS, Sarbanes-Oxley, etc.

Last but not least, they need to gain greater control on the exploding direct and indirect costs from piecemeal financial analysis that result in a continuous flow of new calculation programmes, new interfaces, endless testing and reconciliation with very few productive results, etc.

FST. So what can financial institutions do to address these issues?

JW. First of all, they must realise that financial analysis is an enterprise-wide concept in its own right. With the right architecture and a contract-centric approach, best practice and regulatory demands will be met both today and in the future at reasonable cost. Secondly, they need to plan and implement such an analysis infrastructure independently of the other current and planned operational systems, which in terms of analysis are only contract and customer data feeders.

In the majority of banks, financial analysis has historically been triggered by accounting and regulatory requirements as well as some departmental initiatives with a lot of ad-hoc processes. It was based mainly on positions (not contracts) and fixed account structures.

The development of dynamic analysis (liquidity management, asset and liability management) of more complex short and long term products and advances in financial theory and mathematics attempted to understand the behaviour of each executed or planned financial contract over time. This was based on assumptions made about the markets, customers (counterparties, collaterals, rating, recovery rate, etc.), the regulation (weighting formulas, capital charges formulas) per se or within a given aggregation. Today, the advanced Basel II requirements and IAS/IFRS 32/39 have made analysis right down to contract level an unavoidable prerequisite.

FST. What do you mean by a unified financial analysis infrastructure?

JW. For almost any business solution, integration means that the information generated at one end of a solution is understood by all of its components, for the defined purpose of the solution, but not beyond. In terms of financial analysis, an integrated solution will in most cases address the queries and calculations in an insular way, within the scope of the solution.

However, this is insufficient for the new requirements affecting financial analysis today, as recognised by IRIS integrated risk management AG in its early days. What is required is a unified approach to financial analysis. Unification has two basic requirements. Firstly, the availability of a proven contract data model allowing mapping of each real life contract in standardised generic patterns of expected cash flows. This is triggered by the associated risk factor and the availability of standardised customer/counterparty structures.

The second requirement is the standardisation and centralisation of all calculations in a single kernel to secure, for example, that the Net Present Value (NPV) calculation of collateral within an exposure uses the same algorithms as the NPV calculation of a given asset for any scenario. This is what IRIS implemented in its riskpro financial analysis infrastructure.

FST. And the benefits for institutions using this unified approach?

JW. The value of unification lies in the universality and consistency of the financial products replication and valuation. The major benefits are summarised in the boxout.

Last but not least, this is a unique opportunity to substantially reduce the total cost of ownership and operation of financial analysis because as there is only one single analysis infrastructure, only one interface by transaction system, etc is required. Furthermore, the tedious and costly reconciliation processes of the past for internal and audit purposes are no longer required. One leading consultancy has talked of cost of ownership and operation savings of over 30 percent per annum. The experiences of some IRIS customers that have already realised the benefits of unification confirm or surpass this figure.

FST. To what extent is a unified solution a real option for financial institutions and how can they best take advantage of it today?

JW. Until recently, a solution like riskpro was restricted to only very large and visionary organisations, with the necessary knowledge and the development capabilities of hundreds of man years of investment, as well as the corresponding financial means. Today, the functional and financial modularity of such a solution allows it to be tailored to the true needs of small to large institutions, with the option of increasing the scope of use at any time later.

riskpro currently satisfies the financial analysis requirements of over 200 banks, both large and small, in industrialised and developing countries. The results of the analysis have been implicitly accepted by 15 central banks. Over 200 financial institutions can’t be wrong!

The implementation of a unified financial analysis infrastructure represents a unique opportunity for best practice and rationalisation. It is the best investment in infrastructure a financial institution can make for today and tomorrow. However, this will only happen if there is strong vision and commitment from the top of the organisation, with the CEO and CFO as prime beneficiaries.

Implementing a unified analysis infrastructure based on a field proven standard solution is feasible today at reasonable cost, even for small organisations. IRIS has shown this in practice. Such an undertaking increases the quality and flexibility of the analysis in a business where transparency and precise pricing of risk plays an increasing role and allows reducing substantially the cost of analysis. However, the benefits will only be fully realised if implementation happens in symbiosis with the evolution of the risk and with profitability management culture and processes. Furthermore, even with the best unified financial analysis infrastructure ‘a fool with a tool is still a fool’ … but this is another story.