Unstructure

In the coming weeks, the U.S. government and the surviving financial services institutions will have the daunting task of unravelling all the securitized loans and other instruments that are hiding illiquid investments. But does the technology exist to do that? And if so, could it have been used to prevent the bad debt from hitting the fan in the first place?

Theoretically, the financial service providers were clear on the risks of each type of loan and had a way to gauge whether they had enough capital available if the riskier loans went south. Their back-up plan was always to sell assets if raising capital became difficult. Everyone seemed to underestimate the liquidity risk inherent in the global financial system.

Had these financial services companies and banks established business intelligence metrics as to the ratios of what kind of debt they were holding versus the capital they held and whether liquidity existed to reduce assets when necessary, their analytics systems might have driven alerts earlier in the process. The use of business intelligence tools embedded in an enterprise-architecture would have come into play.

Interestingly enough, the advent of active credit portfolio management of corporate loans protected many financial institutions from more typical corporate loan portfolio problems. Unfortunately, these systems did not extend to all asset classes in a financial institution’s portfolio. In many cases, senior managements were not even aware of their exposure to securitized assets let alone the return/risk profile of those exposures.

While integration of data and the analytics around financial investments could help prevent future financial meltdowns, it’s also true that the integration of business activities on a global scale helped get us into this crisis in the first place. Understanding cross-border risk is just one example where IT systems could have made a difference in signalling oncoming difficulties.

The information is too scattered throughout the firm and held in silos of information systems.

Up until now, technology in the financial services industry has been focused on capacity -whether an application can handle high volume and volatility – rather than on process. There is no process flow map that tells organizations who owns what pieces of what risk.

Even with the right technology in place, it may not do any good unless senior managers actually change their firm’s strategy based on the business intelligence generated by integrated systems. What are the barriers to realizing this vision?