Financial Risk Management Software

What is Financial Risk Management Software?

Financial risk management software solutions are computer-based programs that help identify, measure, and model out the risk associated with specific financial risk exposures. Investment in financial risk management software by firms is a form of risk mitigation. The software is widely used by companies in the financial services sector as they are typically exposed to many different counterparties and many diverse types of financial risks. 

Why is Financial Risk Management Software Important?

Financial risk management software is especially important for the financial services sector, given that firms within this industry assume a large amount of financial risk from various sources. These risks include, but are not limited to:

• Market Risk – the risk that losses may occur to financial assets based on the dynamics of the overall financial markets, for example, an equity security losing a large portion of its value
• Credit Risk – the risk that a counterparty may default on their obligations, for example, an individual defaulting on their personal loan
• Liquidity Risk – the risk that funding obligations may not be met due to cash constraints, for example a bank not having enough cash on hand to meet deposit withdrawal demand.
• Operational Risk – the risk that losses occur from the result of failed internal processes, people, and systems, for example, an employee making a mistake on a transaction, which results in a monetary loss.

Financial risk management software is developed to manage and mitigate these risks. There are multiple uses for different types of financial risk management software, each with different functionality. 

For example, loan risk can be assessed methodically and consistently using financial risk management software. In this instance, a lender enters information about the borrower such as credit score, current debt capacity, income level, and so on into the software platform. The software then automatically generates a credit risk assessment for the borrower, as well as determines the profitability potential of the borrower.

Who Uses Financial Risk Management Software?

Financial risk management software is typically utilized by financial services institutions such as banks, insurance companies, and investment managers. However, every company has risks that can be mitigated, at least in part, by the use of appropriate financial risk management software.

Types of Financial Risk Management Software

While the financial services sector is a key user of financial risk management software, all companies and sectors benefit to some degree from financial risk management software. Different types of software include:

1. Treasury and payment management software – this software helps mitigate risks associated with payment fraud and liquidity.
2. Risk management for investment management software – this software helps mitigate risks associated with investment portfolios such as security and asset class exposures.
3. Credit risk management software – this software helps mitigate risks associated with counterparty credit risk.
4. Fraud detection software – this software helps mitigate risks associated with internal and external fraud.
5. Internal compliance software – this software helps mitigate risks associated with compliance issues such as employee conflicts of interest, insider trading, and so on.

Beyond these five major types of financial risk management software, there are many others as companies face a wide range of financial risks.

Evaluating Financial Risk Management Software

As technology has improved tremendously as of late, risk management software has become more sophisticated and is now able to solve much more complex problems. Most financial risk management software is designed to generate data-driven insights. This means that the software continuously updates results and insights as it incorporates new data, which leads to better results over time.

When evaluating financial risk management software, it is important to consider the following:

1. Level of integration – A company should consider how easily financial risk management software can be integrated with existing enterprise resource planning (ERP), accounting, and treasury management systems.
2. Ease of use – A company should consider the complexity of the financial risk management software. Ease of access and use is important. If the software is difficult to use, it is more likely to be used incorrectly or underutilized.

Additional Resources

Thank you for reading CFI’s guide to Financial Risk Management Software. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

• Credit Risk Analysis
• Funding Liquidity Risk
• Enterprise Risk Management (ERM)
• Enterprise Resource Planning (ERP)
• See all risk management resources