Risk to become dominant strand of banks’ business models

01 June 2006News

Joy Macknight in Toronto

Risk management will become the main plank of institutions’ business and operating models in the near future, according to Michael Zerbs, president and chief operating officer of Canadian risk specialist Algorithmics.

Speaking at the ninth annual Algorithmics’ ARC conference last month, Zerbs predicted future changes in the risk management industry. “Innovative risk and reward management will become the dominant source of value creation. Financial institutions will unbundle and reconfigure business models around risk management, on their own account and for their clients,” said Zerbs. He added that transparency, speed and commoditisation will put increased pressure on the established operating models, as well as the industrialisation of operating and risk processes to compete and enable change.

The ARC conference attracted over 250 customers and partners, including the Bank of New York, Citigroup and St. George Bank. The theme of the conference was “creating strategic advantage by intelligently taking risk” with Basel II taking the centre stage for many of the sessions.

Ben Gully, managing director, Basel Implementation Division Office of the Superintendent of Financial Institutions, Canada, warned banks of the dangers of treating Basel II like a Y2K project. “Do not build a solution just to appease supervisors — if you have, you probably aren’t going to be Basel compliant and you have missed the point,” he said. He left the conference with two key messages: firstly that Basel II is about risk management, not technology; and secondly, that to succeed banks will need to understand the interplay between all three pillars.

Algorithmics took advantage of the conference to announce three new contract signings with banks: KBC and FirstRand Bank have chosen Algo for risk management, while Landesbank Baden-Württemberg has enhanced its collateral management program through Algo to builds its business.

KBC is using Algo Capital, which provides portfolio models to calculate economic capital across all banking and trading areas, to manage its portfolio credit risk. South African FirstRand Bank has subscribed to the Algo OpVantage Financial Institutions Risk Scenario Trends database of case studies to incorporate the case studies into its risk assessment and scenario program. German public sector bank LBW will expand its coverage of Algo Collateral to respond to increased volume of over 300 collateral agreements.