Since the financial crisis, risk management in banks has grown in importance, and therefore so has the need for digitization. Regulations have called for stronger risk management of business processes. The first direct requirements for capital requirements and liquidity management were introduced in Basel III, but this has continued since.
Digitization of Risk Management in Banks
The regulator has effectively been enabled to form a better overall image across institutional boundaries.
This is the origin of stress tests and other comparative tests carried out by the regulator. The comparisons also resulted in efforts to harmonize and standardize different risk types.
Examples of this type of harmonization are the Minimum Capital Requirements for Market Risk (MCRMR), BCBS352, known a Fundamental Review of the Trading Book, as well as the Standardized Measurement Approach for Operational Risk (SMA). This move towards standardization is also obvious in credit risk.
Standardization as a threat?
These standardizations, however, may pose risks to bankers. The dialogue between regulator and financial institutions may need to be strengthened in this area. In the end, we will only successfully avoid or overcome a new crisis if everyone is doing acceptably well. This may mean diversification and discussion, not standardization.
We will only successfully avoid or overcome a new financial crisis if everyone is doing acceptably well.
In addition to concrete adjustments to quantitative surveys of risk, qualitative analysis of risks is also becoming more and more important. This is basically digitization of the process of enumerating risks.
For example, BCBS239 is partly aimed at improved transparency and quality of the figures. Both the Federal Reserve (CCAR) and the ECB (SREP) are now adapting their auditing processes to include qualitative features focused on the risk management process itself.