While risk managers within some banks did spot the early warning signs of a pending crisis, the risk models and analysis used have also come under harsh criticism in the wake of the crisis, particularly for their inability to speak to senior executives in a language that they clearly understood. In other words, if you take this level of exposure in your CDS portfolio, this, this and this will happen and oh by the way, i have sliced and diced the data for you and presented it in a rather colourful line graph or pie chart, that can be quickly read and interpreted, not some complex mathematical formula.
What the financial crisis boils down to, notes Venkat Mullur, senior director, industry solutions, TIBCO Spotfire, is that “People who were making the decisions didn’t understand what Value at Risk (VAR) meant,” – VaR being a common risk modelling technique used by banks. “There was a cognitive gap between the model and analysis and consumers of that data,” not all of whom were mathematical geniuses.
Post-crisis I think we can safely assume there were too few so-called "geniuses" within banks, as there was a lot of exposure to things banks did not really understand. If only someone had bothered to portray the risk analysis for them in a more easily digestible manner than perhaps they would not have been all so keen to pile into CDS. The question is what to do about it?
Going forward if all parts of the businesses within a bank are to understand the outcomes of data analysis across all lines of the business, Mullur argues that data or business intelligence needs to be presented in a more easily digestible, flexible and dynamic format.
Business users also need to be able to perform on-the-fly data analysis on a whole host of different data without having to revert back to IT. TIBCO’s answer to this dilemma is to leverage the business intelligence and predictive analytics capabilities within its in-memory Spotfire 3.1 platform. Spotfire uses a range of data visualization techniqes such as “conditional coloring and lasso and axis marking that allow for better data analysis of patterns, clusters and correlations among sets of variables. Multiple scale bar charts and combination bar and line plots can also be used to analyse unstructured, ‘free-dimensional’ data to identify key trends (see diagram).
“Spotfire allows users to analyse data in a more intuitive way and to make better sense of the data needed to predict future events,” says Mullur. Analyst firm Forrester has given Spotfire the thumbs up saying that it “puts the power of predictive analytics into the hands of any business user, with data visualizations they can understand, and a level of interactivity unmatched by traditional business intelligence (BI). That means, says Forrester, that statisticians and business analysts can “prototype, test, and deploy analytics much faster than with alternative statistical modelling environments,” such as spreadsheets, which do not easily allow for ad hoc analysis by business users.
It’s easy to see why TIBCO and Forrester are bullish about Spotfire, particularly when advanced data analytics of the past has been the preserve of “rocket scientists”. So there will be no excuses now for banking CEOs to say they did not understand the risks the business was undertaking in a particular investment portfolio or line of business when their risk or business manager presents them with colourful line graphs and pie charts of various statistical analyses they have performed.
And it is not just commercial banks that are likely to benefit. Mullur says it is also working with global regulators to help them get a better handle on risk analysis.
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