Spotlight on financial risks
Traditional risks are making a come-back. Here's what you need to know about credit risk, market risk, and emerging risks that are not yet on your radar.
In the current environment, risk management teams are battling on multiple fronts. New risks are emerging, but the events of the past year prompted the industry to question the state of the more established and mature risks. In this feature with industry experts, we put the spotlight on credit risk, market risk, and new emerging risks that are just on the horizon.
"In the US and parts of Europe inflation levels are at a 40-year high. That translates into rising interest rates which will impact credit risk. Banks are macroeconomic hedge funds, so it just has a direct impact on credit risk, and credit risk is the essence of what banks do – they provide credit.
We’ve worked on credit for so long. We’ve been through Basel II on the advanced approach for credit; we’ve had IFRS 9 in South Africa and across Europe, which we’ve implemented. But I still think there’s a lot more that we need to do in managing credit risk now, going through this inflation. We tend to be quite backward looking in our credit risk management. All the modelling we do is premised on historical data, and I think we’ve got to get better at being more forward looking."
“There’s no question, we’ve moved from a benign credit cycle to an average or even stress cycle which is going to have incredible implications, especially small and medium-sized firms. […] Credit risk, bankruptcy risk, default risk, and the whole issue of assessing credit worthiness are going to be front and centre in risk management going forward.”
“You really have to get [climate risk management] in all phases of credit risk management and credit processes to get it inside the credit decisions and into the culture of the people making the credit decisions. It’s not enough to have the tools available, for example the information on the greenhouse gas footprint of customers or how they’re transitioning to the green economy. You also need to have a cultural change where the people making the decisions are actually taking those things into account. We want to facilitate that as much as possible by giving them the tools, but it’s really about how the organisation thinks about it.”
“One thing that we learned from the last 2-3 years is that the market can change radically very quickly. We came from a low interest rate environment to now, where the central banks around the world are moving interest rates up. Inflation is also going up, so there’s definitely a new environment for financial services to deal with. One thing I’ve seen […] is the need to be agile, to be resilient, to be able to adapt quickly, and to be strong enough to stay on course. It’s really challenging but on the other hand, it could be very good for some, but maybe not to all.”
“We’re definitely looking at XVA as a major challenge for banks, [for example,] being able to handle the capital impacts on their trading books, calculating CVA and MVA. Linked to that is the initial margin and being able to project that forward accurately is a big challenge both computationally and quantitatively.”
"In the past 2 years we’ve experienced a bunch of unprecedented scenarios. Unprecedented scenarios can be something that never happened before or something that did happen before but long enough that we don’t have data or it’s irrelevant to use it for modern studies. […]
Obviously, no one could have predicted [Covid-19] but a responsible risk manager should have been prepared to the fact that markets will crash and that governments will not come to the rescue."
“You may not prevent things happening but at least we are ready to move so our operational resilience is heightened. Part of it is about having the processes in place so when these problems occur that you haven’t foreseen, you can adapt.”
"The obvious threat is climate change and how it’s going to manifest itself in physical risks that end up with us paying more claims or that people that we invest in and insure suffer losses, but there are other risks that hide behind that. If we think about the transition as the world moves from this version of itself to hopefully a version in the future that’s less susceptible to climate change, the actions we take along the way are going to create risks as well.
Some of those risks will be quite a surprise to us. […] The president of Barbados anticipates that there might be 1 billion climate refugees by 2050. The world’s never faced anything like that before so there are some really big risks that might be coming along."
