All financial institutions, be they retail banks, insurance companies, wholesale and investment banks, or even companies operating in the energy and utility domain, are increasingly focusing on the accurate, timely measurement of risk, and on taking the adequate management actions in response. The tension field between four secular trends, is at the heart of this development.
Even though the risk appetite of different segments of the capital markets may fluctuate over time, the ever increasing possibilities to isolate and package risks have brought with them a focus on adequate returns for the capital put at risk. Combined with the trend to fair value based reporting, this is quickly forcing all parties involved to not merely be prudent, but accurate in assessing the risks assumed and the rewards/return received.
The ICT revolution of the last 20 years has made that transaction volumes and speed have exploded in the financial markets and that reporting requirements have increased, both in content and in timeliness. These transaction and reporting flows that constitute the plumbing of the financial world are rarely mentioned in the newspaper headlines. When they do hit the front page, it is usually because of an operational risk turned reality. Usually, this also leads to the secondary effect of reputational damage. Internal control of all processes related to capital markets operations and the company's risk monitoring and management is therefore on top of the agenda of all layers of management, of stakeholders and of the regulators.
A minimum of financial modelling literacy is needed to thrive in today’s financial services institutions. Consider the multiple areas of the capital markets and finance world where some degree of mathematical modelling is part of daily life:
Sometimes literacy is not enough and deep quantitative skills are needed, to design, implement and operate valuation and risk models, even for public reporting purposes.
Deregulation of markets, for instance the power and gas markets the last decade, and innovative product design, such as the boom in credit default swaps and CDOs, go hand in hand with waves of regulation, aimed at securing the financial system and its users (IFRS, MiFID, Solvency II, Basel II, UCITS III,…).
Regulatory compliance is part of the cost of doing business. Nevertheless, those organisations that learn how to operate effectively within those boundaries, can turn this into a competitive advantage and reputational added value.