Why risk reporting needs to get quicker

Interactive management information (MI) helps a firm embed feedback cycles into its strategic decision-making. This, in turn, helps firms quickly understand whether risk management strategies are working as intended and where they need to be rethought.

Early on in the COVID-19 pandemic, an online dashboard built by John Hopkins University became the world’s ‘go-to’ source for information. The dashboard pooled data from around the globe, offering intuitive drill-down features that let users interact with the data to answer questions of their own choosing. The result was a truly useful tool: a practical guide to action in powerfully uncertain times. Crucial issues could be examined at pace.

  • How far and how fast was the virus spreading?
  • What were the trends for testing and mortality?
  • What did the future look like, based on our best understanding of the data?

The speed and pragmatism of this and other dashboards should have given financial institutions pause for thought. If a small team of medics can create useful dashboards, why can’t banks and insurers? Especially when these large corporations control all the data and systems they would need. The need is certainly there. COVID-19 has upended well-laid risk management plans across the Financial Services industry as firms have raced to keep up with events, and governments have intervened with a multitude of schemes and special measures.

Traditionally, though, firms’ governance committees react rather slowly – and with a delay. They typically rely on paper print-outs of last month’s statistics provided for a monthly (or even quarterly) meeting. Commentary on the numbers often focuses on explaining how we got where we are and what to expect in the near term. COVID-19 has challenged that way of working because senior managers have been forced to adopt radical new risk management strategies whilst deprived of the stable data sets upon which they’re used to depending. They’re also having to review hundreds of pages of documents on screen.

To see how other decision-makers have solved this problem, firms may want to consider military intelligence cycles. On such cycle is the OODA loop developed by Colonel John Boyd of the US Air Force. Adapted for business use, it boils down to the following four steps:

  • Observe changes in your business environment – absorb external and internal information and circumstances
  • Orient and understand the impact of these changes – how do you want to position your firm? Can you apply lessons from past experience? What’s new in what you’re seeing now?
  • Decide what to do – choose the best of the available options (testing on a smaller scale if necessary)
  • Act – and then observe what happens

OODA is a loop because as you act (and interact with your environment), you generate fresh observations which you can use to tweak your strategy or change course. The faster your decision-making cycles, the better the chances that your risk management strategy will succeed. Any rivals with slower decision-making cycles will tend to make poorer decisions and end up with fewer options from which to choose.

Figure 1: The OODA loop

Traditional risk reporting is at odds with the OODA loop because printed reports take too long to assemble, draft, edit and sign off. They are particularly bad at handling follow-up questions or drill-down requests. In contrast, interactive dashboards with customizable scenario analysis can answer questions that arise during the course of the review and challenge process. By adding continuously updated information, they help prioritize management actions as they seek to address changing risks. As a result, decision-making cycles should be faster and information more widely shareable across the business.

Making interactive dashboards a reality

Until now, the promise of interactive dashboards at Financial Institutions (FIs) has been held back by technology and computing speeds. It takes millions of rows of data and hundreds of millions of calculations just to aggregate the data on all of a bank’s customers and come up with simple metrics such as ‘exposure’ or ‘impairment’.

If you want your dashboard to drill down into the detail, all those sub-totals and disaggregated calculations need to be stored somewhere. If they are in the dashboard itself, that eats up huge amounts of memory and makes it unwieldy. But if you re-run the calculations only when users request a particular view, you need vast computing power to cope with all possible permutations of slicing and dicing the data. The problem grows exponentially if you want to run different scenarios for your book.

Luckily, huge amounts of memory and vast computing power are now cheaper than ever (Moore’s Law continues for now). As a result, interactivity and scenario explorations are moving into the realms of possibility. However, to overcome the obstacles, banks need to consider the following:

  • Sound data management is the cornerstone of accurate reporting. You simply have to get the data right. Make sure you implement solutions that automate data management and provide data lineage;
  • You now have one more reason for migrating to cloud infrastructure, since it can be scaled up and down, in line with your reporting needs;
  • Flexible reports still require a sustainable infrastructure with clear business rules and transparent data lineage that can provide a clear audit trail for internal and external review;
  • Anything that gives more power to an end user for their own analysis also provides more risks for misinterpretation and drawing out incorrect conclusions;
  • No single dashboard is best for every user. Your boardroom readers will be asking different questions to those asked by your product-specific credit risk analysts;
  • Don’t forget data behaviours, which is often ignored until you find out your users are copying statistics from the dashboard into their own tools. Therefore, encourage dashboards as an integral part of day-to-day risk management and improve trust by having a feedback loop of challenging data and requesting further information;
  • Never be lulled into complacency by a focus of what’s available. What’s NOT included in a report or dashboard can sometimes be the most telling thing about it.

Done well, interactive dashboards allow a strategic feedback cycle of data to quickly understand if your strategy is working – and if not, what your firm should do about it. It a world where big events happen quickly, that’s a pretty fundamental advantage.

For more information on how we can help transform your risk reporting, contact:

Dan Oakey                                         Ed Venter

Associate Director                            Senior Manager

Risk Analytics                                    Risk Analytics