Getting a Global View of Risk

While other banks' global risk-management systems exist mainly on the drawing board, Bankers Trust has begun to tie together its far-flung trading operations with a comprehensive monitoring system.

Banks have paid more attention to evaluating various types of credit, currency, and trading risk. But Bankers Trust New York Corp. is way ahead of the pack with a system that gives executives a unified view of the bank corporation's exposure worldwide, according to analysts familiar with the project.

The Bankers Trust system will make different trading floors into one trading floor, coordinating activities across markets and across continents. Currency traders, for instance, might follow strategies that are in tune with bond traders.

A Move Toward Consistency

"You can have strategies that are consistent for each desk so that, at least by the end of the day, you can match up the events that have taken place," said Thomas Abraham, Andersen Consulting Co.

Both J.P. Morgan & Co. and Chemical Banking Corp. are said to be pursuing similar projects. Bankers Trust, however, is ahead in moving its trading floors to digital technology and converting its software so it can be shared across a network. Other banks are focusing on less complex forms of risk assessment, such as asset/liability analysis or portfolio management.

One of the reasons banks need to manage their positions more aggressively is the new capital-adequacy rules established by the Bank for International Settlements, effective next year. According to the guidelines, banks will have to maintain risk-weighted capital reserves of at least 8% of their total assets.

Data from Many Sources

Bankers Trust is now bringing its New York trading floor onto the risk system. London and Sydney, Australia, have already been converted, according to Digital Equipment Corp., which is helping the bank install the network and computer systems.

The bank will convert other trading floors over the next few years. Bankers Trust officials declined to be interviewed for this article.

The technology involved consists of many components, including digital networks that link trading desks worldwide, and distributed applications that can extract information from many sources. Traders then share these analytical programs across the network.

By distributing the applications across the network, a trader in New York can make a trade that changes the bank's position; then, the head trader in London or Tokyo can see that information instantaneously and instruct his traders to pursue other parts of the position.

Sky-High Costs

Such a system can cost tens of millions of dollars to build, said Stephen P. Davis, manager for trading operations and exchanges, Digital Equipment Corp.

Currently, banks have a plethora of software managing foreign exchange, Treasury bonds, government-backed securities, commodities, and other instruments. The first step is for a bank to integrate systems worldwide for a single market such as foreign exchange. Eventually other investments can be added.

"Bankers Trust offers a whole panoply of swaps, options, derivatives like futures. In addition, they're trading for their own accounts in foreign exchange," Mr. Abraham said.

"A lot of different systems allow them to gauge their own risk, or client's risk, so the challenge is to put the pieces together to get timely information. It doesn't do any good to see risk after the fact."

Risk-Adjusted Perspective

Bankers Trust is a leading user of risk-adjusted return on capital to measure the profitability of businesses and products, based on how much capital they consume and how risky they are. A higher-risk business is allocated a higher proportion of capital, but it must also get a higher yield in order to be worthwhile.

These systems are aimed at normalizing risk across a variety of instruments, by showing how much of the value of the position is at risk and how volatile the yield. The system can calculate worst-case scenarios and how long it would take to sell off the holding.

In addition to managing risk, the system will reduce operating costs substantially. About one-third of the costs of a trading-floor operation are spent correcting back-office errors, said Mr. Davis.

And if barriers to investment banking activities for commercial banks are removed, such systems will become even more valuable. "Any relaxation on regulations will put more cost pressure on banks," said Mr. Davis.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.