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Contents

 

Contents

1

 

Introduction

2

Information Discovery in Banking and Finance Industry

 

2

 

Role of Information Discovery

 

2

 

Introduction

2

 

3

 

Risk Management Portfolio Management

4

Case Study

5

 

Organization

 

5

 

Background

5

Challenge

5

Response

5

References

6

Introduction

Data might be the valuable assets in any business but it is vital only if one knows how to discover the valuable information hidden in raw data, this process is collectively known as information discovery. Information discovery enables us to extract knowledge from the past data, and predict the future condition. It facilitates the business decisions optimization, enhance the value of every customer and communication, and increase customer satisfaction index. It is the method of extracting previously unknown and hidden information which may be helpful in decision making, generally in the form of patterns and trends, from huge operational databases. In the contemporary scenario, organizations are experiencing the advantages that are associated with Information discovery It is a powerful tool—by eliciting the useful information from the terabytes of data collected, an organization can command a competitive edge over the other similar organization. It may help organization in an exhaustive understanding of the huge amount of data stored in the CRM systems. In the past few years, many organizations (especially banks) have realized the critical importance of the information they are having of their customers. Data- Mining, can find products which are often bought together, which facilitates to design product bundles which are likely to be more in demand.

Information Discovery in Banking and Finance Industry

Role of Information Discovery

In the contemporary banking industry, data repositories are set up by banks and financial institutions. In these data repositories, some valuable information is stored but this information is not easily visible which makes impossible for a human to come up with valuable information (or Trends) that will further help in the decision making. Thus considering the order of data bits many companies by availing this opportunities developed some data discovery tools.

Information

applications

Discovery

Introduction

in

various

banking/finance

In the forthcoming section, we will discuss banking realms, like risk management, portfolio

Management, trading, customer profiling and customer care, where Information discovery techniques can be used in banks and other financial institutions to enhance their business performance Information discovery h e l p s solving business problems in banking and finance by discovering patterns, correlations and causalities in information and market prices which are not obvious to managers because the bits of data is too large or is generated too rapidly to be analyzed by experts. The bank managers may travel an extra mile to discover the sequences and periodicity of the behavior of the customers which results in accurate segmentation, targeting, acquisition, retaining and servicing profitable customers. Business Intelligence and data mining techniques may help them in finding various classes of customers and design a customized product / pricing approach .Inputs from various realms of financial market like foreign exchange ,options ,equities data from portfolio etc is loaded in a global data warehouse and data marts now analysts with the power of Information discovery techniques provides help in the various different banking and financial market procedures like assessing credit and market risk in designing an effective portfolio strategy.

Figure: Use of Data Mining
Figure:
Use
of Data
Mining

Techniques in Financial Business

The categories of application of information discovery methodology in the realm of banking and financial industry vertical may be seen as follows:

Risk Management

Management and measuring risk is a core activity of any financial institution. The major c h a ll e n g e in the industries like banking a n d insurance w o r l d is implementation of risk management systems so as to measure & control business. Major challenge here surrounds Credit and market risk, one can see a apparent change in the

realm of how to measure and grapple with them, supported by the data mining.

  • a. Financial Market Risk

For instruments, like stock indices, interest rates etc measurement is based upon models contingent on a bunch of risk factors, such as interest rates, stock indices. One is looking for a functional form among instrument price or risk and risk factors.

Today t he r e is no d ea rt h o f market risk measurement methods. Most of them rely on models depicting single instrument, their interaction with market. Many of this can only be built by use of various Information discovery techniques

  • b. Credit Risk

Credit risk assessment is core component in commercial lending. Without Credit risk assessment the lender would be unable to make a decision of lending to the prospective borrower, or to how much charge. In commercial lending, risk assessment is normally a n effort to quantify the risk to the lender. Here credit risk can be quantified by the change in valuation of a credit product or of a credit portfolio, which is dependent on change in the instrument’s rating, the default probability. Any further diversification affects the result on the level of portfolio. Thus a major part of implementation and care of credit risk management system will be a typical data mining problem: the modeling of the credit instrument’s value through the default probabilities, rating migrations, and recovery rates.

.

Portfolio Management

All the Risk measurement methodologies of an consolidated portfolio level helps quantifying the probable risk associated with a collection of instrument. Whereas all the models of forecasting available today give us an idea on the expected return or the value of instrument, both expected return and instrument value make it feasible to manage the portfolio in an risk or return effective manner. With the advent of Information discovery techniques financial investors are capable of allocating capital throughout trading activities to increase profit or decrease risk. This characteristic supports the possibility to make trading recommendations and giving structure to portfolio from user’s profit and risk requirement.

By the power of data

mining it

is fairly possible to make exhaustive scenario analysis

abilities pertinent to probable asset prices / returns and the risk associated. With

This feature , t h e

what-if simulations i n

t h e

v a g a ri e s

of market situation e.g.

interest rate, foreign exchange may be executed to determine the impact on the value and/or risk associated with the instruments portfolio, or trading desk. Different scenario results may be regarded by simulating actual market conditions. Th e

e x h a u st i v e

a n a l y sis

o f Profit and loss empowers users to reach a asset class.

Case Study

Organization

Company: Beijing agricultural bank (BAB)

Background

BAB was a very widely spread bank across Beijing due to which it has to handle a mammoth operational database which makes it ungainly and thus makes it difficult to extract information out of it and simultaneously causes the performance issues in OLTP application. In order to improve performance and operational efficiency, the bank then decided to take out its legacy historical data from online transactional data. This would result in an optimized database for online transactions, improved response time and decision making by implementing a large data warehouse that would store all the historical data.

Challenge

BAB had a huge database (almost 3.5 TB) which even continues to grow at an exponential pace. There are around 3 million users and 700 branch offices and 800000 loan accounts but this number is growing like anything. Thus because of this quantum of data it became almost impossible to gain any knowledge out of it. Thus bank decided to implement a data warehouse and data mining solution.

Response

a) An ETL process was set up on daily basis to move data from online database to warehouse.

b)A highly scalable data warehouse was built in conjunction with the data mining solution.

References

  • a) "Data Mining: A Competitive Tool in the Banking and Retail Industries", Dr.Madan Lal Bhasin, The Chartered Accountant October, 2006.

  • b) Introduction to Data Mining, Tan, Steinbach and Kumar, Addison Wesley, 2006

c)

Assessing

Loan

Risk,

A

Data

Mining

Case

Study,

Rob

Gerritsen,

...

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