Risk driven intelligence is an important parameter for guiding all strategic decisions such as CapEx investments, M&A transactions, venturing into a new market, or launching a new product
In today’s business environment, organizations around the world, particularly financial services organizations, are determined to build a “no-surprise” operating environment to hedge against inherent market volatility. In our experience working and learning from some of the largest banks and financial services organizations in the world, we have seen first-hand the need for greater intelligence around an organization’s risk profile. The messages coming from the Board of Directors and Senior Management further articulate this need for a new kind of risk management, one that includes other data points besides traditional ROI calculations alone. Risk driven intelligence is an important parameter for guiding all strategic decisions such as CapEx investments, M&A transactions,venturing into a new market, or launching a new product.
Risk Driven Intelligence: MetricStream’s Vision for Better Business Performance
The MetricStream solution for Enterprise-Wide Risk Management is designed to provide a risk based approach for generating risk driven intelligence, which aides in strategic decision making, and ultimately leads to better business performance. A risk based approach to strategic decision making provides management with a systematic way of recognizing and managing the risks associated with today’s volatile business environment in order to stay one step ahead of the risks, one step ahead of the opportunities, and one step ahead of the competition. By using a risk based approach to strategic decision making, organizations can:
- Calculate various outcomes and reduce the impact of risk events
- Increase visibility into the risk profile at all levels of the organizational hierarchy
- Entrench risk management into the everyday workings of the organization
- Improve the firm’s capital allocation and free capital for more profitable endeavors
- Leverage opportunities to enhance profits without taking unaccounted risks
- Align risks to business objectives for enhanced executive and Board review and reporting
Risk Driven Intelligence: What Does it Mean for the Organization?
Risk driven intelligence leads to a higher market valuation for firms. This correlation is intuitive and based on the fact that firms with higher visibility and control over their enterprise-wide risk exposures achieve higher degrees of certainty around decisionmaking and performance. Thus, shareholders of firms who use risk driven intelligence for strategic decision making reap a higher return on their investments.
The MetricStream solution provides risk driven intelligence at multiple levels of the organization, giving key stakeholders risk information, which assists in making faster and more reliable business decisions. All stakeholder groups within the organization benefit from risk intelligence generated from the MetricStream solution for Enterprise-Wide Risk Management.
Board of Directors
- Overview of key business processes, top risks, and vulnerabilities provides context for decision making (Ex. CapEx, M&A transactions)
- Heat maps of top current risks (through year end), emerging risks (1-3 year time horizon), and strategic risks (beyond 5 year time horizon) aids in strategic planning and forecasting
- Assessment of risk management approaches and frameworks provides a thematic correlation across risk assessments and across organizational hierarchies and processes
- Review of policies, procedures, metrics, staffing, and approaches informs strategic executive level decision-making
Chief Executive Officer
- Linkage between business objectives (revenue, EBITA) and risks develops probability distributions for likely business outcomes, rather than point estimates
- Forward looking risk assessment information, integrated with the static, historical data about business processes, functional groups, or M&A transactions guides strategic decision making
- Integration of information across business functional groups increases efficiency and collaboration
- Data trends serve as early warning signals for decision makers about the risks and threats to earnings
Chief Financial Officer
- Static, backward looking data from ERP systems is replaced with forward looking data with probability and likely impact of key risks,which enables more informed business decision making
- Central repository of risk information provides a framework which enables management to develop a risk appetite and pursue risks in order to achieve business objectives
Risk Driven Intelligence: MetricStream’s Built In Analytical Engine
MetricStream’s analytical engine automates the process of identifying, measuring, monitoring, analyzing, and managing all kind of risks, and enables businesses to integrate their risk data including risk and control assessments, loss events, key risk indicators, and issue/action plan management, within one single environment.
MetricStream’s analytical engine provides a rigorous, scientific methodology for assessing and managing risk. The solution incorporates a broad range of analysis techniques to meet and exceed the best-practice recommendations of the Basel II Loss Distribution Approach (LDA).This solution provides a comprehensive portfolio of functionality for business intelligence, predictive analytics, financial performance and strategy management, and analytic applications in order to provide clear, immediate, and actionable insights around performance, with the ability to better predict and control future outcomes. Some of the risk analytics capabilities built into the solution is as follows:
- Monte Carlo simulation techniques for modeling internal and external losses at 99.99% confidence level, and back testing of VAR results
- Conducts Ops risk capital calculations which can be used for efficient risk-based capital allocation
- Ensures transparency of modeling parameters, assumptions, and techniques to support local regulator audits and understanding
- Generates comprehensive VAR model documentation for future updates
- Delivers BCIEF and Insurance Cover adjustments in accordance with Basel II
- Helps banks define their own best-fitting techniques and distribution for various loss types and business lines. Supported severity distributions include log normal, Pareto and Burr
- Provides a fully parameterized modeling architecture to adapt to each bank’s unique modeling requirements, supporting internal audit and independent verification of modeling results (Basel II requirement)
The MetricStream solution’s analytical engine provides a wide variety of statistical and graphical techniques, including linear and nonlinear modeling, classical statistical tests, time-series analysis, classification, clustering, and others. The solution integrates risk indicators and control assessment scorecard results for dynamic modeling of operational VaR. Having an accurate picture of VaR enables organizations to optimize capital allocation, to satisfy business best practices, and to regulatory requirements.