Surya Software Systems, who specialize in analytical solutions for integrated financial risk management, organized a conference on Risk Management in Banks, with a focus on Regulatory Perspectives. The Keynote speaker was Mr. G. Gopalakrishna, Executive Director, Reserve Bank of India with responsibility for Risk Based Supervision. He was supported by Mr. Jayant Yardi, a director on Surya’s Board and career banker with special expertise in Financial Risk Management and statistical methods.

Mr. D.N. Prahlad, founder of Surya Software Systems, initiated the Conference, noting that Regulators are increasingly calling for automated systems and procedures in financial risk management in order to sanitize reported data against contamination from ‘tweaking’.

Mr. Yardi offered an overview of international trends in risk management, stressing the need for banks to better appreciate the Risk-Return-Capital Adequacy equation; failure to do so contributed to the Global Financial Crisis (GFC) of 2007/08. Scrapping the Glass-Steagall Act in the US and the associated laissez-faire philosophy in the West have shown India’s RBI-regulated financial sector to have fared comparatively better. The wheel is turning back, with the West moving back to better regulation, vide the Dodd-Frank Act.

A recent survey of banks shows a change in banks’ culture vis-à-vis the risk and return balance; plentiful liquidity encourages greater risk taking. This has prompted appreciation of the basic risk metric, that Revenue is a function of Risk. And as regulators will increasingly focus on ‘Stress Testing’ (ST) in supervision, which requires major computing capabilities, IT systems will be central to balancing Risk: Return effectively. Surya has already developed an extensively back-tested PD (Probability of Default) model which is non-parametric, using advanced statistical algorithms, which most others do not use.

Mr. G. Gopalakrishna reviewed the Indian banking scenario with regard to financial risk management since the 1980s, where 4% of liabilities was almost the sole criteria as capital adequacy for licensing! But by the 1990s RBI had moved to the CAMELS approach for supervision, and by the 2000s RBI was demanding better Assets & Liabilities Management (ALM) and looking at Risk Based Supervision (RBS). The liberalization and deregulation of late-1990s made ALM and liquidity management critical challenges for banks and regulators. Post 2010, IT has enabled banks to tackle this better through computerization.

Consequently RBI has moved away from the static CAMELS approach, to SPARC (Supervisory Program for Assessment of Risk Capital), and selected 29 banks initially for implementation.

While most countries’ regulators develop their own supervision models, some quantitative and some qualitative, RBI has adopted a blend of the two, with emphasis on off-site analysis of data, backed up by on-site testing of data quality. This is critical to effective RBS, but data integration and MIS are still very weak in many respects.

The need for computerized automation in banks to deal with this challenge will put a strain on their capitalization requirements, but most banks are already addressing requirement.

He concluded by advising that the RBI has already created a High Powered Committee to give effect to RBS. When the system is well established banks will be scored on Basel Pillar I, II and III factors, graded, and advised of their capital requirements as a result of the exercise.

The Conference concluded with an animated Question and Answer session, followed by Mr. Prahlad’s comprehensive coverage of Surya’s products, existing and planned, as well as some of the new solutions Surya is ‘looking at’ such as –

‘Treadmill’ –
for stress testing, which looks like being the regulators’ future focus.
‘One View’ –
to integrate Risk, Returns and Capital; a fine balance that banks aim for.
‘Yammer’ –
a business-social platform.

‘Minimalistic Data Warehousing’ –
tailored to client-defined requirements.

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