Financial risk and financial risk management technology (RMT): Issues and advances

Bruce Hannan and Lewis Ross of R/lanufacturers Nanover Trust Company for generously sharing their time and knowledge of risk management in the investlnent banking industry. Methods for sound risk management are of increasing interest among Wall Street investment banking and brokerage firms in the aftermath of the October 1987 crash of the stock market. We present an overview of the basic definitions and issues related to risk, and the management of financial risk and financial risk management technology (RMT) for information systems (IS) technology professionals. We discuss of the content of risk management technology, including the models, the software and hardware, and the market data required to track risk. We also discuss the identification of risky events, alternative approaches to the measurement of risk, and how investment firms go about formulating strategies to control financial risk. We next show how changes in the information technologies supporting these tasks have led to improvements in the control of risk and in the design of products which involve financial risk. Advances in five areas that are of interest are: communications software, object-oriented programming, the use of parallel processors and supercomputers, and the application of artificial intelligence and neural nets. Although these new information technologies create significant opportunities to improve global and departmental risk management, a basic question that must be addressed involves the costs associated with their implementation. Thus, a third contribution of this paper is to analyze the extent to which the implementation of these technologies will affect firm costs. To this end, we evaluate the components of the cost function for risk management, and consider some ways that the new technologies can be applied to reduce overall costs.