risk management

Introduction Following the financial crisis, the banks have witnessed unprecedented levels of scrutiny from regulators. When faced with unforgiving public opinion and continuing market volatility, institutions face significant challenges in re-establishing financial strength. To restore credibility institutions have been assigned the task of building upon their stress testing processes and frameworks to deliver greater transparency, [...]

Credit Risk Deterioration - Early Warning Indicators

The financial crisis had a devastating effect on the financial sector and, in turn, the global economy. After the dust settled, it became clear that many firms had failed to invest enough resources to formulate effective early warning systems, which are critical in detecting the initial signs of credit deterioration and default. Although capital markets are returning to conditions suggesting that the crisis is finally subsiding, the best institutions should remain cautious. All banks should continue to strengthen these early warning indicators, which necessitates proactive and dynamic systems and metrics that are regularly updated.

Top-Down Approach to Market Risk Appetite

In the quest for enterprise risk management, several banks have recently undertaken radical reorganisation efforts to integrate different risk teams into a more collaborative whole. However, any permutation of reporting lines and designation of roles can prove to be an expensive – and ultimately, desultory – exercise in the absence of a sound and communicable risk culture. Mitigating this situation requires a top-down approach to setting the risk appetite of the business, which can be mediated by risk factors collected through a bottom-up approach.

Dodd-Frank Financial Reform

The Dodd-Frank Financial Reform Act is the response of the United States to the deepest global recession since the Second World War. The fact that the sub-prime mortgage contagion germinated within the financial services industry, before spreading across entire economies, is reflected in the multi-faceted nature of the Act. When President Obama introduced the Financial Reform Plan in 2009, providing the foundation for the Dodd-Frank Act, he termed it the most sweeping overhaul of regulation since the Great Depression.

Risk Governance and Policy

Since the onset of the credit crisis, there have been a number of high profile failures in the financial services industry, which have exposed glaring shortcomings in the corporate governance framework at major banks. Previously, the governance framework at banks gave undue precedence to revenues and reward at the unfortunate expense of effective risk management procedures. Moreover, there was insufficient oversight of senior management by the Board and organisational structures were too complex, which further exacerbated an already substandard framework. Now, however, significant changes are being pursued by major banks to redefine this framework and accord greater authority to Risk Managers.

Mark / Credit Risk Dashboards

Since the financial crisis, several banks have reorganised the Risk Management department so that it can effectively serve as a second line of defence against the excesses of business lines. Part of this goal is to ensure that information on key risk metrics is available to all stakeholders at all times so that damage from a potential tail event can be punctually forestalled.

The Future of Effective Risk Organisation

In light of the financial crisis it has become prudent for financial services institutions to become more economical and efficient with the resources available. One obvious way of doing this is simply by streamlining the workforce; however, this is not always possible, and only prudent to a certain extent. When resources can no longer be pressed for further productivity, off-shoring and even outsourcing are possibilities that have seriously been considered in recent years.

Credit Stress Testing

Stress testing is an integral tool when it comes to risk identification and mitigation. The importance of stress based risk management has been further accentuated of late. With increasing regulatory scrutiny, banks are required to conduct more comprehensive and rigorous stress tests. Stress exercises and tools are now more integrated with the overall risk management framework and are recognised as key component of a more contemporary approach.

Reputational Risk - Quantification and Management

Building a solid reputation can take a number of years, even decades, although, ultimately, such an initiative ought to be more of a continuous endeavor. Whilst no specific timeframe can be associated with a superior reputation, it is important to bear in mind that even a momentary lapse can significantly affect the reputation of a bank. As such, reputational risk needs to be prioritized and allocated the level of interest and resources that it warrants.

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