IT helps banks strengthen their risk management

IT helps banks strengthen their risk management

Zatni Arbi, Columnist, Jakarta
zatni@cbn.net.id

I remember listening to a lecture by Professor Seiji Naja of the University of Hawaii in the late 1980s. He asked the audience how the way the Japanese regarded their banks differed from the way the Americans treated theirs.

The witty academic went on to say that the Japanese used their bank as a place to deposit their money and let it grow, while the Americans looked at theirs as an institution that they could rob at any time when they needed money.

"That is why the Japanese are better off than the Americans," he said. It was during the time that Japan's economy was at one of its highest peaks and property prices on the beautiful Hawaiian islands were skyrocketing because Japanese were arriving in hordes on property buying sprees.

It turns out that Indonesians also have a unique use for their banks: They are the institutions from which they can steal money in staggering amounts and do not have to feel disgraced by it. In Bahasa Indonesia, the phrase for this type of activity is membobol bank. It literally means "to break through the walls of the bank," and has increasingly become a common phrase in our daily conversation.

Each time a gang of crooks -- which invariably include one or more insiders and, not infrequently, high-ranking executives -- steal billions or even trillions of rupiah from a bank, we the customers may not immediately feel the impact. Therefore, in most cases we tend to read the news with a somewhat detached attitude, forgetting that the banks could use these funds to improve the quality of their services.

The funds could be used to add new ATMs or even introduce new delivery channels that would give us more banking convenience.

They could also use the funds to train their tellers or even raise their salaries so that we might enjoy much faster and more professional services from more cheerful bank employees.

Better still, they could channel the funds to SMEs as loans and enable them to develop their businesses.

It is strange that our banks can still be ripped off so easily today, one right after the other, while all over the world the banking industry has been undergoing sweeping reform.

Today, banks are required to build an internal capability to manage their risks properly. Risk is an integral part of any type of business. More often than not, the higher the risk, the better the return. However, to ensure survivability, all the risks have to be well managed, and the banks are no exception.

In the banking industry, in particular, at least three kinds of risk have to be managed: Credit, market and operational risks. There is also what they call "legal" risk. The fact that our banks can still be ripped off so easily shows that operational risk management in our major banks still has a long way to go. It also shows that they do not have an effective early warning system in place.

Perhaps the most important initiative in the global banking reform is the Basel II Accord. It deals with issues that include risk management. The worldwide deadline for compliance with Basel II principles has been set at 2006. In Indonesia, according to deputy director of the directorate for banking research and regulation at Bank Indonesia (the central bank) SWD Murni Astuti, our banks have been given until March 2004 to come up with their individual plans for implementing the accord.

Incidentally, Murni was speaking at a recent seminar on risk management organized by PT Berca Hardayaperkasa at Shangri-la hotel, Central Jakarta.

What is interesting about the Basel II Accord is that technology is its fourth pillar -- the other three being minimum capital requirements for the various types of risk, supervisory review of institutions' capital adequacy and internal assessment processes, and market discipline and mandatory public disclosure.

The fact that banks have become one of the industries that depend so heavily on technology is absolutely understandable. Banks even compete with each other by implementing the latest and most innovative technologies that they can get hold of.

Convenient delivery channels -- ATMs, Internet banking, mobile banking, which we now take for granted -- would not have been possible without the use of advanced technologies. However, the fact that risk management has been made possible by information technology may not be as widely known.

"Banks have to deal with a lot of data," said Sanjeev Shukla, Senior Consultant at I-flex Consulting, one of the speakers at the seminar. In their databases, the banks maintain data on customer accounts, on their credit card activities, on remittances, you name it. The database should have a level of detail -- granularity -- that will allow staff to explore the data until they obtain the data they are seeking.

Besides the transactional data, banks now have to feed themselves with market data from Standard & Poors, Reuters and other data providers. To manage credit risks, they also have to use data on industrial sectors so that they will be able to determine the level of exposure that they should have to a particular industry.

The seminar featured a presentation and demonstration of a dedicated solution for banks that wish to strengthen their risk management with information technology (IT). Called Reveleus, and developed by I-flex Consulting, the modular solution offers tools and analytics that banks can use to ensure that their risk management infrastructure complies with Basel II.

An interesting aspect about the presentation was that the argument that the IT industry is passive was simply unsupported. As the Basel II-based Reveleus solution demonstrates, the industry still has a lot of opportunities to come up with highly focused products and services. Granted, much as the people at I- flex or other vendors -- including Peoplesoft, which also offers solutions for Basel II compliance -- have a keen eye for an opportunity, industry participants will also have to sharpen their ability to identify specific requirements that they can fill. And then continue to grow their business.

As to membobol bank, we still have to brace ourselves. Surveys carried out by Bank Indonesia in 2000 and 2002 revealed that major Indonesian banks were already aware of the need for proper risk management. Commitment to the principles is a different story. No matter how sophisticated the quantitative model for risk management the banks use, it will not mean much without commitment by the management -- and the banking authorities.