Kamakura Corporation: An Integrated Panacea for Risk Management
Dr. Clement Ooi
The principles of risk management strategies have always taken the rap for financial market doomsdays and collapses, the sole reason why Suresh Sankaran believes that the finance world needs to take a fresh look at risk management. Sankaran, the MD and Principal Risk Officer of Kamakura Corporation, who heads, develops and provides enterprise risk management (ERM) and Basel advisory consulting services to Kamakura’s global clientele states, “In the wake of the global financial crisis of 2007, banks are making substantial changes to their risk management strategies. And with tighter regulations now in place, the role of liquidity risk has emerged as a core element of risk assessment.” From being an unremarkable factor that no one talked about much in the past, liquidity risks have become one of the most densely regulated areas in the financial world. The reason for this abrupt change is quite clear: the 2007-08 crisis ultimately revealed that a lack of liquidity puts the entire financial ecosystem at risk. Although a catastrophe, the financial crisis did teach a crucial lesson—risk factors are interlinked and impact each other in ways that could lead to portfolio contamination quickly. It is here that Kamakura Corporation has positioned its value proposition, which is their ability to take an in-depth and analytical approach to risk management, and model services around it in an integrated fashion.
Having gained the reputation for being one of the world’s leading integrated financial risk management service providers, Kamakura tailors a holistic software solution and eliminates the need to rely on multiple solution vendors; this by itself is a first in the banking technology landscape. “A lack of preparedness to embrace unexpected compliance changes may cost enterprises a dime and a dozen. Collaboration with Kamakura Corporation can put such adversities to rest,” adds Dr. Clement Ooi, the EVP and MD of Asia Pacific Operations at Kamakura Corporation. Founded by Dr. Donald Van Deventer in 1990, the firm’s key offerings are the Kamakura Risk Manager (KRM) and Kamakura Risk Information Services (KRIS), which help financial institutes in the effective management of assets, liabilities, credit portfolio, and market risks. The company’s service suite also includes the Kamakura Online Processing Service (KOPS) and Kamakura Risk Consulting Service (KRCS) targeted at corporations that require risk management insights but can’t procure a dedicated solution.
Geared toward an Analytical Approach
While KRM is completely integrated risk management software, KRIS, on the other hand, is a subscription-based service, which provides predefined probabilities for every listed company in most of the countries around the world. KRCS integrates extensive industry knowledge, quantitative finance research, and practical experience in financial companies and other organizations.
Our strategy is rooted in a well-accepted approach that is already popularized through value at risk
Kamakura’s services portfolio is complemented by its research-driven, unparalleled, and transparent risk mitigation approach, which Dr. Ooi believes differentiates the firm from several solution providers belonging to the banking technology realm. In order to better understand risk in all its forms, a stochastic process is operationalized that provides Kamakura’s experienced analysts with numerous potential scenarios. “Such scenarios include changes in the market conditions, macrofactors, and counterparty creditworthiness,” states Sankaran. After running this stochastic process and analyzing the different scenarios that may arise, the firm can effectively assess the changes in a customer’s cash-flow, based on all the potential risk factors. This allows analysts to arrive at an ‘at risk’ score for the customer and implement risk management modules.
The approach is well-structured when compared with the standard risk management assessments, as it takes customer behavior patterns into account, including how pre-payments and early withdrawals can affect cash-flows. An organization’s risk appetite and risk tolerance, and liquidity as a second order risk are also taken into consideration in order to accurately identify the critical risks associated with each asset class. Kamakura manages liquidity through the careful management of other related risks and strives to determine the relationships between risk categories. “Our strategy is rooted in a well-accepted approach that is already popularized through Value at Risk (VaR), and provides a good alternative to the standard gap analysis that is traditionally employed to understand cash-flows,” explains Sankaran.
Kamakura’s unique and innovative approach is equally supported by its research team, spearheaded by Dr. Robert A. Jarrow, the managing director of research at Kamakura and an alumnus of Cornell University. “Kamakura’s organizational endeavor has always been underpinned by academic research of over a quarter of a century, and this rigor manifests itself in our solutions seamlessly,” informs Sankaran.
The research-based delivery that they embark upon provides clients the intricate details of risk management calculations and helps them in deriving better decisions.
"Regulations have always been a knee-jerk for financial institutes, and we are well-positioned to assist them"
Sankaran decrypts the tenets that best describe his company by recalling the experience of working with a world-renowned financial institution. The client faced a dilemma in lending a high-volume loan to an automobile firm that was on the brink of bankruptcy. “They consulted Kamakura before taking a plunge that may have proven costly,” Sankaran adds. The solution that they offered helped the financial institution in the accurate assessment of risks involved in the investment and averted a massive financial blow. Additionally, it enabled the company to help its clients comprehend the degree of profitability in regions perceived to be best suited for geographic expansion before arriving at decisions.
Mitigating the Regulatory Hurdles
Another distinction within the Kamakura risk management framework is the incorporation of customer behavior dynamics to assess changes in contractual cash-flows seamlessly, and this result in a better appreciation of the liquidity and sensitivity risk structures, thereby capturing organizational risk scores. “Regulations have always been a knee-jerk for financial institutes, and we are well-positioned to assist them in a number of ways to comply with the stringent regulatory endeavor,” states Sankaran. The Kamakura Risk Manager suite of products is equipped with a state-of-the-art stress test builder that can take into consideration today’s regulation and any forecast strictures that may be imposed by the regulatory authorities. This ensures that the solution is scalable, and can cope with not just the present regulations, but also anything conceivable that regulators may impose upon the sector over time.
During its three-decade-long journey, Kamakura has amassed the trust of more than 350 customers from 60 nations. In the near future, the company intends to enhance its products to amplify its clients’ abilities to foresee compliance changes and financial risks that may adversely affect their balance-sheets. Sankaran concludes with a couple of simple suggestions for financial institutions to follow and keep the risks at bay. “Apart from complying with central bank regulations, financial institutions need to constantly look for risks mushrooming in their environment, which could possibly affect the finance ecosystem. In my opinion, this is the simplest yet one of the most vital risk management measures,” he says.