Analysis: Financial Markets’ New Demands and Business Intelligence
The recent financial turmoil has served to raise awareness that we need to fully understand complex investment products and the benefits and risks they bring.
- By Mike Schiff
- October 8, 2008
The recent turmoil and liquidity issues in the financial markets can be expected to affect business intelligence practitioners as requirements and demands for tighter regulatory and compliance rules will undoubtedly result in new demands for analyses, monitoring, and performance management.
While I have previously hypothesized that the current economic downturn would result in increased BI spending as organizations sought ways to cut expenses, reduce fraud, up-sell existing accounts, and find new customers, the financial events of September 2008 will serve to further augment this demand. Any governmental action to shore up failing companies will almost certainly involve additional and ongoing monitoring and analysis of these companies; in an effort to prevent other companies in the same industries from repeating the mistakes of the troubled companies, they are likely be more closely monitored as well.
There are several areas where increased BI usage is likely to come into play. Some of these, particularly in the banking and investment industries will be a direct result of expected new regulatory reporting requirements that will be imposed on organizations to more closely track, monitor, and update the market values of their investment portfolios. Others, not necessarily dictated by regulatory requirements, may, for example, result from organizations seeking to better analyze and understand investment manager performance, determine the risk exposure associated with various investment vehicles, or better analyze insurance coverage and the financial strength of the company standing behind the policy.
Although there are several well-established commercial companies that rate securities and insurance companies, many of them failed to foresee the events of the past few weeks. They will likely perform more detailed analyses in the future while some of their clients may perform independent analyses of their own.
With no-income-verification loans no longer being aggressively marketed, companies that deal with consumer financing will be analyzing the finances of loan prospects in greater detail and will likely further deploy additional data mining techniques to identify characteristics common to people have been late in paying and/or who have defaulted on their debts. Non-financial companies (for example, any company offering a defined-benefit pension plan), may see additional requirements for monitoring and reporting on the investment portfolio backing the pension benefits, both in terms of up-to-date market values and increased reporting frequencies.
Much of this new demand is not part of existing budgets. In situations where new reports and analyses will be required by law, it may cause existing, already funded projects to have their priorities reset and be postponed or even reconsidered; not having the budget to generate legally required reports and analyses will simply not be an acceptable excuse. Resource-constrained organizations may have to cut back on offensive BI deployments such as those involved in efforts to increase revenues or market share, in order to be able to adequately address more defensive regulatory requirements. Although the details of new reporting requirements have yet to be defined, organizations unable to meet compliance requests are likely to suffer sanctions such as fines, possible exchange de-listings, or loss of investor and customer confidence.
In addition to obtaining the necessary tools and analytic applications, organizations will need skilled BI practitioners to deploy them. To better prepare for this demand, it may be helpful for both IT practitioners and non-financial business analysts to better educate themselves on the financial markets. This would be a good time to dust off their "Economics 101" textbooks or enroll in an economics course if they have never taken one.
If the statement that "a properly diversified asset mix should not exclusively involve assets whose movements highly correlate with each other" makes little sense, then it may also be time to upgrade or refresh your knowledge of statistics. This will also help you better understand and interpret data-mining results. After all, IT and business analysts have always claimed to be business partners striving towards the same organizational goals, and a basic understanding of economics and statistics will help both groups better understand and analyze business issues while helping to ensure that they speak the same language.
The recent financial turmoil has served to raise the awareness of the need to fully understand complex investment products and their associated benefits and risks. Business intelligence technology, in the hands of skilled practitioners, will be the vehicle to accomplish this and will lead to additional BI deployments.