Use this button to switch between dark and light mode.

How to Use Text-Based Data for Financial Services Risk

April 20, 2023 (3 min read)
Api sets and third party datasets can help mitigate financial services risk

In 2021, McKinsey, in collaboration with the Federation of European Risk Management Associations (FERMA), conducted a survey on resilience behavior and organizational management. Noting a “striking difference between corporates and financial services organizations, the research revealed a much higher percentage of staff allocated to risk and compliance within financial services than corporate entities.

The reason? The financial services industry remains one of the most highly regulated in the world. With so much pressure to establish efficient, cost-effective risk management processes, third-party data APIs offer an ideal opportunity to accelerate risk awareness.

The role for big data in risk management

Since financial services organizations are ahead of the curve in terms of robust risk management processes, the challenge lies in optimizing these processes further to keep pace with both the volume of work needed and the changing risk landscape over time. McKinsey notes that 75% of risk managers say future resilience depends on improving the risk culture, adding, “Important additional areas are improved risk-data aggregation and reporting and more advanced foresight capabilities.”  

A flexible, third-party data API can help risk professionals in financial services achieve these goals.

Enhance visibility into current potential regulatory risks with text-based data

A flexible data API that deliver key regulatory data, such as sanctions lists and politically exposed persons lists, enable you to integrate timely information into your risk management workflow. Particularly during times of heightened geo-political upheaval, such as the war in Ukraine, maintaining a keen eye on changes in sanctions and PEPs is crucial to avoid inadvertent risk exposure. APIs that deliver data directly into risk assessment, due diligence, and other risk management tools help mitigate exposure to financial crime, bribery and corruption risk posed by sanctioned individuals or entities.

You can also gain the foresight needed using historical and current regulatory news and legal data. For instance, you can analyze settlement announcements or litigation over time within a particular industry or for a particular entity to understand if it poses a higher investment risk. You can also look for adverse findings related to companies you’re considering doing business with. 

MOREHow to use big data in finance

Integrate adverse media feeds in risk workflows to identify emerging threats

Most regulators recommend incorporating adverse media screening of third parties as part of a risk-based approach. So do industry associations, like the Wolfsberg Group—an association of 13 global banks. The organizations’ FAQs on Negative News Screening highlights benefits of adverse media screening, including:

  • Revealing involvement in criminal activity which warrants additional due diligence or targeted reviews of past transactions to determine if you should “onboard, maintain or exit a relationship” with an individual or entity.
  • Establishing the risk classification of a relationship to determine whether ongoing risk monitoring is needed.
  • Providing additional context for investigations into suspicious activities or enhanced due diligence.

The Wolfsberg Group suggests that adverse media is a “… useful screening mechanism which enables Financial Institutions to have a better understanding of who they are doing business with and the risks to which an Financial Institution is exposed.”

MORE: Top 3 ways financial research can help your portfolio through layoffs

Stay on top of risks and opportunities associated with ESG performance

As the world began to emerge from the worst of the pandemic, global consultancy EY wrote, “The world has an opportunity to reset and build an improved economic system that works for both people and the planet, and no sector is better placed to drive this transition to sustainability and a stable future than the finance sector itself.” The Financial Services sector can really benefit by using text-based data, like ESG news and ratings, to mitigate risk and identify opportunities.

On the risk side of the equation, automated monitoring of news articles and other text-based content related to ESG factors can reveal potential ESG risks that may impact a company’s financial performance.

In addition, you can use natural language processing to conduct sentiment analysis of ESG news. This can help you understand how a potential investment target or business partner is perceived by stakeholders and the public, allowing you to make informed decisions to reduce reputational risk exposure.

Impact analysis of text-based ESG news data can also give you a leg up when it comes to investment insights. By ingesting ESG news and ratings data, you can track how a company’s ESG performance over time impacts financial performance, enabling to you make smart buy-sell decisions and create ESG-focused products to meet emerging demand.

Are you making the most of third-party data in your current risk management processes? Talk with a Nexis Data+ specialist to find out how our enriched data can enhance your risk management approach.