The New Face of Risk Management

Transcription

1 Enterprise Risk Management The Evolving Face of Risk Management Ming Soong Tham Adjunct Professor National University of Singapore Risk Management Institute

2 AGENDA THE GLOBAL FINANCIAL CRISIS POLITICAL REACTION INDUSTRY REACTION IMPLICATIONS OF THE FINANCIAL CRISIS IMPERATIVES FOR THE FINANCIAL SERVICES INDUSTRY CURRENT STATE RISK MODELS TECHNOLOGY RISK MANAGEMENT TRENDS ENTERPRISE RISK MANAGEMENT THE NEW FACE OF RISK MANAGEMENT LESSONS FROM THE AUTONOMOUS CAR IMPLICATIONS QUANTITATIVE FINANCE FINANCIAL SERVICES INDUSTRY

3 THE GLOBAL FINANCIAL CRISIS: The roots of the crisis extends back to early 2000 A combination of deregulation and low interest rate environment Misplaced assumptions of risk diversification Increasing complexity of financial products, lack of transparency, and income pressures Poor implementation of capital framework Misaligned performance measurement practices Failed financial institutions were compliant with regulatory requirements Northern Rock; Royal Bank of Scotland Regulatory compliance is not a guarantee for solvency

4 A DECADE OF FINANCIAL AND ECONOMIC INSTABILITY

5 A DECADE OF FINANCIAL AND ECONOMIC INSTABILITY

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9 POLITICAL REACTIONS Political pressure mounts with increasing taxpayer bailout Increased demands for stress tests As contagion spreads, increase in reactionary measures Eurozone Formation of the Financial Stability Board April 2009 G20 Pittsburg September 2009 statement Basel III, Dodd-Frank, Volker Rule, et al

10 INDUSTRY REACTION Development of hybrid capital products Contingent Capital Bonds (CoCos) Increased competition for funding liquidity Greater push for profitability to offset increases cost of compliance and declines in Return on Equity Cost cutting in non-profit generating activities Fine tuning of risk models to reduce capital and liquidity requirements

11 IMPLICATIONS OF THE FINANCIAL CRISIS Increased market volatility and complexity Reduces reaction time for opportunities Reduces reaction time to mitigate risks Increases demand of appropriate, reliable information and analytics Need to improve assessment of risks Both quantifiable and non-quantifiable risks Recognise the connections between events, and between risk types Increased in resources required: Perform regulatory stress tests Manage greater volume of data and market volatility Better understanding of client base

12 IMPERATIVES FOR THE FINANCIAL SERVICES INDUSTRY Improve capital and funding positions optimisation not reduction Improve risk assessment process greater accuracy and speed Strategies aligned to long term sustainable growth and value greater integration of regulatory objectives into strategic plans and tactical executions Optimised business model better understanding of risks and opportunities Align risk and performance measurement better accountability

13 CURRENT STATE OF RISK MODELS Largely based on historical data Focus is on structured data, and on a silo basis Development of operational risk models still lag behind market and credit risks Little integration of models across risk types Limited in the number of risk factors, limited by the amount of available data and computational capacity

14 CURRENT STATE OF TECHNOLOGY DARPA Grand Challenge and the autonomous car WATSON, Jeopardy and Healthcare Stream, Cloud, Grid and In-Memory Computing Big Data Moore s Law Enhanced consumer grade components and improved cost effectiveness

15 RISK MANAGEMENT TRENDS Shorter cycles, bigger data, increasing complexity Increased connectivities Greater demand for data and appropriate, timely analyses Market Risk Liquidity Risk Reputational Risk Credit Risk Operational Risk Other Risks

16 Risk Management Trends Risk Interconnection Map RIM 2010 Source: World Economic Forum Global Risk Survey 2010

17 RISK MANAGEMENT TRENDS Scenario Analysis and Reverse Stress Tests Increasing regulatory pressures Intensity and scope Opportunities for differentiation Greater amount of data Ability to analyse better Capacity to anticipate and react faster Efficiency in capital deployment

18 RISK MANAGEMENT TRENDS Applying current technology In-memory computing Tablets and portable computing Achieving value through PROACTIVE capabilities Better identify opportunities Better anticipate risks Better enhance sustainability Better wealth preservation

19 RISK MANAGEMENT TRENDS Enterprise Risk Management Introducing new practices connecting risk types Integrating quantifiable and non-quantifiable risks Broadening Ownership Improving timeliness Impacting strategies and operations

20 ENTERPRISE RISK MANAGEMENT What it is NOT A collection of quantitative models A collection of methodologies A collection of systems What it IS A mind set change An integrated strategy An improved operational effectiveness An interdependent risk culture

21 ENTERPRISE RISK MANAGEMENT

22 ENTERPRISE RISK MANAGEMENT Assesses Capital Adequacy/Availability; Manage Capital Structure VALUE CREATION IN PRACTICE STRATEGIC OBJECTIVES Strategic Initiatives; Revenue Targets CAPITAL MANAGEMENT Estimates Required Economic Capital, Set Risk Parameters Risk Appetite RISK MANAGEMENT BUSINESS INITIATIVES Estimates Portfolio Growth; Develop Tactical Initiatives

23 ENTERPRISE RISK MANAGEMENT

24 THE NEW FACE OF RISK MANAGEMENT Better understanding of internal capabilities and external expectations Leveraging on available technology to provide forward looking capabilities Moving away from regulatory compliance towards social responsibility Recognition and engagement of a broader group of stakeholders regulators, financial institutions, rating agencies, academia Realisation of a social agenda and responsibility

25 LESSONS FROM THE AUTO-CAR Incorporating most current data Data processing and analytics at real time speed Ability to acquire a wider range of data Changing the way we live, improving safety Ability to react to unexpected events on a more timely fashion

26 IMPLICATIONS FOR QUANTITATIVE FINANCE Moving away from reliance on historical data Removing restrictions on the number of risk factors used in models Possibilities for self learning models genetic algorithms/artificial intelligence Changes model development and validation process Shorter turnaround time for model development and testing, stress testing, more useful what if analyses

27 IMPLICATIONS FOR FINANCIAL SERVICES INDUSTRY Going beyond regulatory compliance Corporate agility Better understanding of client base, selling solutions and not products Better feel of organisation risk; attaining long term sustainability Engaging and moulding the practice of financial industry regulation Better understanding of systemic risks Contributing to economic and financial stability

28 PARTING THOUGHTS Do not follow where the path may lead. Go instead where there is no path and leave a trail. Ralph Waldo Emerson

29 PARTING THOUGHTS Your time is limited, so don t waste it living someone else s life. Don t be trapped by dogma which is living with the results of other people s thinking. Don t let the noise of other s opinion drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what your truly want to become. Everything else is secondary. Steve Jobs Stanford Commencement Address

30 PARTING THOUGHTS Always try to build something special,... to build important things and have an impact on society. Mike Lazaridis