Using technology to overcome risks
Banks are making prudent use of technology to navigate evolution in the three pillars of risk, says Michael Leung Kin-man, deputy chief executive and chief information officer for China Construction Bank (Asia).
On the credit-risk side, since the collapse of Lehman Brothers in 2008, the focus has moved beyond borrowers' default and towards counterparty risk. Banks are putting in additional measures and systems to assess the risk ratings of their trading partners and make sure they are able to honour their contractual obligations, Leung says.
Meanwhile, continued market volatility - driven by global political and economic uncertainties - has made liquidity management a top priority. To keep themselves adequately funded, banks need to "religiously" manage their capital adequacy and loan-to-deposit ratios - a measure of the coverage of the bank's shorter-term funding over its longer-term loans - and ensure they are low enough, Leung says.
Recent high-profile local fraud cases have led Hong Kong banking regulators to step up efforts against money laundering. Another operational risk that has come under the spotlight is systems risk - a good example of which occurred recently in the US, when trading on the Nasdaq exchange crashed for hours because of a technical glitch.
To address these challenges, banks are devoting their attention to making sure they have the people and the systems in place to manage these risks.
On the talent side, this involves hiring the right people who can understand and foresee market trends and demands. An example is the liberalisation of the RMB, Leung says.
Few in banking would have believed the current pace with which the Chinese currency is becoming available to Hong Kong banks for use in providing products and services to customers. "You need someone who has the connections and foresight so that they can hopefully see what's coming in six months' time," Leung says.
And with the rise of so-called "big data", banks need to pour increasing amounts of processing power into making sense of the huge amounts of information that are available to them.
While banks are well-equipped to use and consume data that is structured - for example, every bank customer has a client record with discrete entry fields - the challenge is to take unstructured data from new sources such as blogs and social media and make good use of it. This data can include text, images or even videos.
"The challenge now for banks is to make use of technologies now being made available to extract data from this vast pool of information to help them make the right decisions," Leung says.