Risk Research Report

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.

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.

Liquidity Risk and Regulation in a Post-Crisis World

The subsiding turmoil in financial markets heralds an era with vast revisions of risk management conventions and regulatory action to forestall another crisis of such severity. While excessive risk taking by financial institutions is summarily consigned the greatest blame, one must be mindful that even the most meticulously planned preventive measures for loss control buckle when assets cannot be sold within a foreseen range of prices.

Operational Risk: The AMA Approach

Ascertaining the gravity of operational risk as opposed to other types is handicapped by the relative difficulty of defining and quantifying it. Fortunately, enshrined within Basel II is an attempt to provide guidance in this direction. The Advanced Measurement Approach to gauge losses arising from operational risk and allocating sufficient capital is the most analytical and flexible method.

Risk Dashboards

Deconstructing the traditionally entrenched silos in risk management is an affair that has gained immense currency in recent months. Even the most benign risk exposures for each specific risk type may prove collective precursors to quite grave issues. To mitigate these concerns, it is imperative to collect, collate and convey all risk metrics that track potential hazards to senior management in a format that is easy to discern.

Measuring and Managing Wrong Way Risk

Wrong way risk is a key area of interest at the moment. In the past, banks were perhaps more focused on default rates, considering them in isolation, but this has certainly changed of late. Measuring credit exposure has gradually evolved and become more sophisticated.

Intraday Monitoring of Market Risk

Although the regulatory climate over monitoring frequency of market risk has been marked by relative ambiguity in recent years, the evolution, complexity and effervescence of financial markets renders intraday reports a sensible approach. However, several issues may yet inhibit its feasibility.

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