Enhancing Financial Risk Management Practices with Business Intelligence Systems

Randall E. Duran, Ding Chen, Li Zhang, Aaron Hallmark

Abstract


The Global Financial Crisis demonstrated that banks and other financial institutions risk management capabilities were deficient and, in some ways, flawed. Given that senior management and the board of directors are ultimately responsible to shareholders for financial institutions’ risk management, it is critical that they be able to determine, at a high level, the bank’s risk exposures and whether its risk management function is operating effectively. In this context, this paper examines how dashboard and business intelligence (BI) information systems can extend and help supplement existing financial risk management facilities. A three-layer framework that supports monitoring of market risk is presented, comprised of dashboard, business intelligence, and business analytics layers. Traditional risk management information systems, which calculate value at risk (VaR), constitute the business analytics layer. This paper focuses on the functions that the dashboard and interactive BI layers of the framework provide and the information systems that can be used to implement them. The aim is to provide simplified and intuitive views of financial institutions’ risk that can be compared with more complex, analytical reports.

Specifically, the layers of the three-tier framework perform the following functions:

Dashboard Layer – enables executives to visualize critical key risk indicators based on raw data available from the enterprise risk management data warehouse that is integrated with other relevant business information that is integrated from other front- and back-office systems.

Business Intelligence Layer – provides the interactive visualization of risk and other business information using BI analysis techniques. It enables the business managers to drill down, and investigate concerns or anomalies that appear in the dashboards.

Business Analytics Layer – computes and presents VaR and stress test information. It is used primarily by risk managers.

To date, there has been little research on how business intelligence systems can supplement traditional risk management information systems and support management-level decisions about financial risk. The framework described in this paper aims to assess financial risk from three different perspectives so as to improve the quality of risk decisionmaking.

Keywords:

Financial Risk Management, Dashboard, Business Intelligence, Value at Risk (VaR)

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