Using Big Data to Forecast Counterparty Risk
by Lynn Brewer, Founder of The Integrity Institute
Risk is inherent in any business. Business models require companies to accept, manage and mitigate risk to the greatest extent possible. Our global economy has indeed proved to be an intricate web of transactions designed to mitigate or create risk, depending upon whom you ask. But what about your counterparties—those businesses which are inextricably tied directly or indirectly to your company, upon which your success or failure is dependent—what are they doing to create risk for your company? How does your company manage to survive if your largest customer or counterparty fails? Managing your own risk now depends upon managing the danger that your counterparties will falter or worse fail virtually without warning, whether as a result of their own poor management or due to circumstances beyond their control such as a global economic crises. How you manage your counterparties could likely mean the difference between success and failure.
Interestingly enough, in January 1999, the International Securities Dealers Association (ISDA) brought together a group of 12 major internationally active commercial and investment banks and announced the formation of a Counterparty Risk Management Policy Group (CRMPG). Today, most of those participant banks are gone—bankrupt, merged, acquired, or failed all together.
In 2008, the failures of long-standing companies like Bear Stearns and Lehman Brothers in the United States, as well as many others, revealed the systemic impact of corporate disasters. The conclusion must therefore be drawn that governance requires a broader focus on counterparty risks and the systemic risks associated therewith. It is no longer about whether your company is doing “the right thing” but whether your counterparties are advancing their own position at your peril. As pointed out in South Africa’s leading accounting magazine Accountancy SA, in its June 2012 issue, the article entitled ’Effective Credit Risk Management: Vital for Business Survival,’ it was noted, with the fragility of business,