Vice President, IBM Risk Analytics
Four years after the worldwide financial crisis began, the recent elections and their aftermaths in Greece and France are fresh reminders that the global financial system and the global economy itself are still fragile. They also teach a powerful lesson about the importance of managing risk.
For many years, investors and regulators viewed government bonds as practically risk-free investments. We now understand how wrong a lot of smart people can be.
Risk exists in all the domains of human endeavor, and, as the financial crisis illustrates, it’s vital for people and organizations to adopt strategies for either reducing risks or understanding them better. This goes for governments, banks, investors and other business leaders alike
In this world of ever-more-complex systems, what is needed is the ability to go beyond the known and explore the unknown. By using technology it’s possible to adopt a holistic view of systems, everything from banking to maritime shipping to retail supply chains, and from that information create realistic scenarios of possible future outcomes of the decisions we make individually and collectively. These scenarios, or models, are the language of risk.
This approach is necessary because it’s often difficult to identify all of the significant risks in a complex system. The financial crisis first shattered our beliefs about supposed low-risk counterparties. It also proved us wrong on “safe” AAA-rated securitized assets. Then we learned that funding would not always be available even for well-regarded financial institutions. Now we face the sovereign debt debacle.
All enterprises face hidden risks. One of the primary reasons for this is they often assess risks business line by business line or function by function. Instead, they should form an integrated view of the entire enterprise, including all assets and liabilities, business strategies going forward and anticipated future investments.
This week at the IBM Vision conference, we will exploring the new technologies that are helping to address risk and solve critical problems that chief financial officers face every day. For example, businesses and government agencies can use analytics software that makes it possible for them to spot fraudulent activity in real time, so they can take action before funds are paid out to crooks.
But, unless it’s managed wisely, technology can cause as many problems as it solves. Too often, business units and functional organizations within an enterprise use different technology tools for assessing risks. That makes it difficult to gain a consistent view of the risk portfolio of the entire firm. The same risk scenario may be interpreted very differently in various parts of the business. A unified approach ensures consistency and gives us confidence that our scenarios are applied in the same way across the board.
Insights are not useful if they don’t lead to action. A unified approach to risk management needs to be complemented with the capabilities to drive action or prepare an action plan.
As the financial crisis has shown, getting enterprise risk right can make all the difference between success and failure for companies–and even countries.