An Introduction To Financial Risk Management Software: Part 1

If you’ve seen Jack Ryan: Shadow Recruit, you’ll know the importance of having a protector of the economy. If you haven’t seen it (or don’t remember), it’s about a brilliant, determined, undercover CIA agent working on Wall Street looking for suspicious financial transactions that could hurt the US economy. It’s a movie based on author Tom Clancy’s character of the same name, so obviously Jack emerges successful at the end. Yet he had to endure quite a bit of physical and mental agony before he managed to save the US from an attack and an economic downfall.

Is your organization in search of a Jack Ryan too? Someone who can find potential threats, come up with solutions on how to overcome them, help execute them and all together save your company from a collapse. It would be amazing, right? However, despite his heroic efforts, even Jack Ryan is susceptible to fatigue and injuries and will ultimately need plenty of downtimes, rest, sleep, days off, etc. Also (and this is important) he’s fictional!

So, what’s the real-world enterprotector? That’s right, we just invented a new word. Enterprotector. It’s a mix of ‘Enterprise’ and ‘Protector’. Why did we do this? Since that’s what Financial Risk Management Software does.

Financial Risk Management Software is that hero that works around the clock to protect your financial interests, be that of your company’s assets or investment opportunities or creditors or even safeguarding from internal errors. Read on to know what the tool does, its evolution and its types in the first edition of this two-parter on Financial Risk Management Software!
 

What Is Financial Risk Management Software?

Simply put, Financial Risk Management Software protects your organization from facing unwanted and catastrophic difficulties resulting from financial developments. It focuses on when and how to best use available resources and financial instruments to minimize losses and risks.

The tools identify, reduce, evaluate, monitor, report and simulate scenarios in real-time to produce data-backed, analytical, detailed reports. Pretty cool, right? The objective is to provide the best solutions to maximize profits and reduce losses and in worst-case scenarios, help organizations and financial institutions stay afloat. Additionally, the software is beneficial in data management, employee performance tracking, asset management, portfolio management and a lot more. Additionally, the tools also list the possible risks in each plan and how to deal with those risks as well. Of course, many plans are executed across long durations, resulting in changes, so it’s important to keep the tools and plans updated.

While Financial Risk Management Software is predominantly used by investment firms, insurance companies and banks or other organizations engaged in financial services, it is cementing its place amongst other industries. It is most likely that your organization already has Financial Risk Management Software integrated into the system. If it doesn’t, then you really ought to introduce one! The important part is that it should meet the current and future needs and requirements of your organization.


After that brief understanding of what FRMS is, let’s take a quick detour and understand why and how it evolved.
 

The Rich And Poor History Of Financial Risk Management Software

Although Risk Management has been around since the 1920s, the modern form was observed in businesses since the 1950s, notably after World War 2. However, Financial Risk Management as a standalone subject began gaining importance in the 1970s. Obviously, this did not include the usage of contemporary software or tools, which came around much later. Over the years, Financial Risk Management itself diversified into subcategory risks and the regulatory focus shifted based on the area of financial concern.
 

• The 1980s

  The biggest collaborative step towards Financial Risk Management came in the late 1970s and early 1980s when central bankers from leading countries got together to discuss and deliberate banking needs and requirements. This was prompted due to numerous issues observed in international currency and banking markets.
  
  In 1988, the Basil Capital Accord (Basil I) was published and released by the BCBS - Basel Committee on Banking Supervision. The Accords addressed concerns about Credit Risk and set guidelines stating the minimum capital requirements for banks. This was enforced by law in G10 nations in 1992 and ultimately in most countries with international banks.

• The 1990s

  Periods of global market volatility and major industrial countries experiencing economic slowdowns that led to a brief recession in 1990, the collapse of western Europe’s Exchange Rate Mechanism (ERM) in 1992, the rapid growth of the e-commerce industry and other key factors resulted in a shift in focus towards Market Risk.

• The 2000s

  Organizations began facing economic problems caused by internal human errors. This resulted in the introduction of safeguards specifically for Operational Risk with the publication of Basel II.

• The 2010s

  By this time, most financial institutions had implemented modern software. Yet, it wasn’t enough to stop the world from falling prey to the 2008 global recession (primarily caused by a liquidity crunch in some of the biggest financial institutions). This worldwide disaster drew concern about Liquidity Risk with a steep increase in Operational Risk losses.

• The 2020s

  The call of the day is planet preservation. Nations are working together to bring in regulatory reforms which factor in reducing environmental damage. As a result, organizations are working to mitigate losses accruing from Climate Risk.

So, why is it important to understand the history of Financial Risk Management as opposed to that of just its software? To understand that it’s an ever-evolving field with a constantly shifting regulatory focus. Hence, tools must be implemented based on the current AND future needs of the organization. Got that?



Now, to safeguard your present and future financial aspects, let’s look at the types of FRMS in the market.
 

The Types Of Financial Risk Management Software

At a basic level, financial risk pertains to just about anything that can cause an economic hindrance in your organization. However, the risks faced are multifaceted and may require specialized scrutiny. Therefore, Financial Risk Management branches into various verticals and the tools available could either be type-specific that offer streamlined focus or cater to multiple types. It is important to understand and identify risks most likely to affect your business and choose software accordingly.

The most common types of risks (and associated FRMS) include:
 

• Market Risk (or Systemic Risk)

  Essentially any risk or loss that arises due to unanticipated movement in the financial market is considered Market Risk. This may be due to changes in financial policies, volatile movement in the financial market, changes in market trends, inflation or geopolitical problems, changes in interest rates, fiscal deficits, or a bunch of other factors. Market Risk encompasses Interest Rate Risk, Commodity Risk, Currency Risk, Equity Risk, etc.

  Financial Risk Management Software can provide information on investment areas to reduce losses on assets, options for diversifying portfolios, hedging opportunities, predictive reports, etc. that can reduce market risk.

• Credit Risk

  Nowadays, most businesses offer customers credit services. This may facilitate quicker processing but delayed payments could end up spoiling business plans reliant on timely payments or even lead to late outgoing payments, giving the organization a bad name. This also applies to delayed reimbursements from financial institutions, e.g.: insurance companies taking longer to settle claims.

  This type of tool identifies customers who are most likely to default on payments based on various factors such as their history, industry, credit score, etc. and outlines a plan to avoid arising monetary shortages and ensure a healthy reserve. For financial institutions such as banks/lenders/investors/entrepreneurs, the risk is offset by offering higher interest rates on loans/borrowings. Using an FRMS ensures you are within limit and reduce any credit-induced risk.

• Liquidity Risk

  Liquidity Risk reduces the risk of not being able to produce cash or liquid assets at the time of need or obligation. Liquid assets are those that can easily be converted to cash (think stocks, bonds, deposits, government bonds, etc.). While the assets you possess may be of high value, converting them during an emergency may see others exploiting the situation, leaving you with less than the asset’s actual value.

  Hence, FRMS presents you with recommendations for periodical cash reserve requirements, when best to buy or sell assets, forecasting cash flows, tracking and managing liquid assets, investment management and recommendations, etc. to eliminate liquidity risks.

• Operational Risk

  Unlike most risks that are caused by uncontrollable external factors, organizations may be susceptible to internal risks as well. These risks come up because of errors within the organization’s systems; factors such as outdated business activities, employee errors, lawsuits, financial fraud, bad business models, poorly planned business activities or even experimental activities that fail to generate revenue.

  The tool help reduces the effects felt by such factors as well as predict possible problem areas. Since it can be deployed across the organization or gather data from other tools in use, the tool allows tracking behavior, employee performance levels, growth areas, the need of acquiring specific experts, finding and flagging errors in financial reports and business plans, etc.

Over time, as the need for financial risk management increased multifold, numerous tools made their way into the industry, offering customized services tailored to meet the needs of different organizations. Each type of risk is unique and needs dedicated software to tackle its adverse outcomes. Well, thankfully we have FRMS!