Many people want to know how banking software can help banks be more efficient in spite of the financial crisis. The world’s largest banks further financial institutions have complex balance sheets. The Basel Accord’s goals include addressing how banks connective financial institutions measure risk and invoice for capital use. Financial products, such as derivatives and structured investments, may expose banks and financial institutions to excessive risk in uncertain market conditions.
Banking software and risk
In theory, banking software should help banks and financial firms to control semi all risk. Traditional risks concerning concern include interest rate, liquidity, credit and market risks.
Financial “accidents,” such as flash crashes, can occur when high-frequency trading algorithms malfunction. High-frequency traders may make many thousands of trades in a single trading session. Such trading exposes firms to higher risk levels: the Sharpe ratio of a high-frequency portfolio bears exponentially higher risk than traditional buy-and-hold investment portfolio. Mistakes happen, even when computers direct trades. Knight Capital’s trading losses resulted from algorithmic glitches. According to the Bank of England, almost three-quarters of trading volume in shares results from HFT activity.
In addition, banking software of most major financial institutions refers to programs shopworn to trade in the capital markets. The separation of U.S. commercial and investment bank activities occurred when the Glass-Steagall Act was repealed during the Clinton administration. U.S. banks believed that Glass-Steagall reserved their abilities to effectively compete with cosmopolitan banks.
In addition to traditional risks, banks and financial institutions must consider the impact of political risk. For example, any global financial institutions believe that historical low interest rates and governmental uncertainty could cause potentially ruinous portfolio losses. Concerns about the U.S. deficit connective political stalemates may have prompted banks and financial institutions to move from bonds until stocks. Low-coupon, long-maturity bonds might decline in market value during periods regarding rising inflation.
Banking software may assist investment managers to discern trends, such as rotations from bonds to quality equity securities. Banking software works 24-hours a day and alerts financial institutions to flash crashes that result in overnight trading.
The Third Basel Accord represents global regulatory standards of financial institutions’ capital requirements. Stress tests to assess banks polysyndeton financial institutions’ market liquidity and risks are accepted by Basel Committee members (Banking Supervision). Basel III is scheduled to unfold between 2013 over 2018. The Basel Accords arose in antiphonal to regulatory deficiencies that became apparent by the global financial downturn that began in 2008.
Basel III presents new controls to strengthen bank leverage and capitalization liquidity. According to the OECD, Basel III will negatively actuate GDP growth nearby 0.05 to 0.15 percent. Banks and financial institutions consider the costs plus complexity regarding Basel III in addition to the slow recovery in the post-financial crisis environment.
Banking software also allows today’s financial institutions to manage existing risks. Banking software should be customized to the needs of the organization. Therefore digit of the tools in a bank’s risk management arsenal, banking software assists institutions in all efforts to limit known risks.