Uncertainty on the horizon: How are risk managers tackling unprecedented disruptions? RiskMinds Q4 eMagazine
Hear from risk management experts in the biggest challlenges they will be facing in 2023 and beyond
Uncertainty on the horizon: How are risk managers tackling unprecedented disruptions?
Insights from RiskMinds International and Insurance 2022
From all of us to all of you: Thank you!
A message from the team
behind RiskMinds International 2022
We want to say a huge thank you to everyone who joined us for RiskMinds International 2022. It was fantastic to see the community connecting for the largest gathering since There was an amazing buzz and exciting atmosphere onsite with 750+ great minds coming together in the culturally rich city of Barcelona.
We welcomed top senior risk minds across the international community to take to the stage to tackle the most pressing challenges and opportunities the industry is facing. The diversity and depth of content across a variety of different formats including presentations, panels, fireside chats, workshops, boardroom discussions and roundtables. This was brought together by 175+ speakers from regulators, academics, buy and sell side was outstanding.
Enjoy the best of RiskMinds International 2022 with exclusive interviews, on-site surveys, the annual photo album and much more!
We welcomed guest speakers who shared their valuable insights on winning minds, diversity and inclusion and globalisation. They shared their expert opinions on a range of different topics including what’s driving the status quo in an age of uncertainty, where we are in the credit cycle, why businesses fail at machine learning and a case study of the Boeing 737 MAX 8 airliner tragedy.
As part of the diversity initiatives at RiskMinds, we had a dedicated boardroom session championing women in risk, discussing female representation across the industry and sharing practical tips on helping women thrive. We also launched a finding your voice talent session. Here, seven future leaders delivered a two-minute presentation using the skills they have learnt in a separate workshop to help uncover the secrets of professional public speakers and improve presentation skills to ‘own the room’. Additionally we invited future RiskMinds to get involved in the discussions and pick the brains of leading experts.
As we approach the end of an extremely challenging year for risk management, this is the place where great minds come together to share expertise, best practice and innovations shaping future standards for the industry.
Thank you again from the entire RiskMinds International team. We very much look forward to seeing you next year.
p.s. If you missed any of the sessions, you can access the discussions you missed on our platform DeepBlue.
Karima Haywood,
Head of production, QuantMinds
Best regards,
Eleanor Halsey,
Head of RiskMinds
The economic impact of
COVID on the
U.S. housing
and mortgage market
Read the results in this recent study from FactSet
The economic impact of COVID
on the U.S. housing and
mortgage market
The COVID-19 pandemic has reshaped consumers’ behavior to an extent surpassing the impact of the global financial crisis of 2008. This fact, combined with drastic policy changes by the U.S. federal government, has effects on financial markets that will be felt for a long time. Today, nearly three years after the first outbreak, the financial markets are battling an entirely new set of economic issues as the U.S. enters the endemic phase of the virus amid rising interest rates and inflation. In this article, we review the impact of these economic changes on the mortgage market through the lens of portfolio risk observed by the FactSet risk model.
March 2020 was a historic month after sweeping stay-at-home restrictions were implemented to prevent the spread of COVID-19. Initially, the lockdowns led to the loss of tens of millions of jobs and a severe downturn in the U.S. economy. Unemployment rates jumped to a record high in April, and the U.S. economy contracted at a speed that hasn’t been seen in recent history.
Want to learn more?
Read the full article on the right:
Smile! Is that you?
Explore the official photo album from RiskMinds International and Insurance 2022
The results are in!
Read the results of our surveys from RiskMinds International and Insurance, and learn what's on risk managers minds in 2022 and beyond
Climate risk, regulations and political unrest. What do the experts think?
Where are we in the credit cycle?
Insights from Professor Ed Altmans session at RiskMinds International 2022 and an exclusive interview with Ed Altman and Gabriele Sabato, Co-Founders of Wiserfunding
The credit cycle has reached an inflection point that could mean much tougher times ahead by 2024 and 2025. This is according to Ed Altman, Max L Heine Professor of Finance, Stern School of Business, New York University.
The benign part of the cycle, enjoyed by US markets and borrowers since 2010 looks like it might be over, Altman told RiskMinds International in Barcelona.
The credit market has already transitioned to average credit conditions, with several indicators showing a distressed cycle, according to Altman, who is also Professor Emeritus at NYU Stern and Co-Founder of Wiserfunding.
Finance professor Ed Altman told RiskMinds he believes tightening liquidity and a rise in high yield distressed debt are precursors to an increase in defaults in the next few years.
Altman primarily uses five credit cycle indicators: Default rates – current and forecasted; recovery rates – weighted average price at default; investor required rates of return; high yield bond distress ratio; and liquidity, using several indicators, including “CCC” rated issuance.
“We have reached the inflexion point from a benign to an average point in the credit cycle,” said Altman. “It’s distressed but I’m not forecasting crisis in 2023. It’s 2024 and 2025 that I’m concerned about, if inflation continues to be at high levels and this recession is still with us.”
The Coronavirus pandemic has already transformed levels of debt in the financial system, he warned.
Financial sector debt has not grown due to regulatory constraints, but government debt globally is already at 100% of GDP on average. Household debt has also grown, albeit more modestly, Altman noted.
“That wasn’t relevant last year because interest rates were so low, but now, it’s incredibly relevant.”
Governments find themselves in a difficult position now interest rates have risen to combat inflation, he suggested, with more money spent on interest and less available for fiscal or infrastructure growth, or to support either the private sector or struggling households with subsidies during an energy crisis.
“It’s going to put tremendous pressure on financial markets going forward. We’re going to see some governments struggling with that burden, so I think the sovereign risk model needs to be resurrected,” Altman said. He emphasised high yield debt – i.e. junk bonds – as the first area he looks at to understand the credit cycle. He noted that in high yield bond issuance was at its highest in 2020-2021, snapped up by the market in an anaemic interest rate era.
“We put a tremendous amount of risk into the system. For every dollar of bank debt there was more than two dollars of non-bank debt issued,” said Altman.
Defaults and bankruptcies remain extremely low, he noted, but this will change, he emphasised. "That is a mirage of what is going to happen in 2023,” he said. “As we get more stress in the system, default rates will rise.”
Where there are defaults, a more benign cycle tends towards a higher recovery rate, Altman noted. In 2022, for example, corporate bonds have enjoyed an above-average 60% recovery rate, with that figure rising to 70-80% for corporate loans. However, rates of return required for high yield bonds have moved from 3% to 5.5%, which Altman characterised as moving from a benign to an average situation – again painting a picture of a market current in balance, but trending towards more stress ahead.
Where there are defaults, a more benign cycle tends towards a higher recovery rate, Altman noted. In 2022, for example, corporate bonds have enjoyed an above-average 60% recovery rate, with that figure rising to 70-80% for corporate loans.
“Historically about 8-10% of high yield is at a distressed level, it was 2% at start of year, and today it’s over 10%,” Altman warned. Liquidity has already decreased and continues to tighten, he suggested.
“If you look at high yield market, liquidity has dried up almost completely. I don’t see that changing in the near future,” he said.
Measuring liquidity can focus on volatility or other measures, but he said he prefers a simpler litmus test for liquidity: The amount of new issuance taking place in the lowest grades of the debt market: “CCC” rated issuance.
“In 2022 there was only one issue of “CCC” debt in the US and it was at a hugely high interest rate. Every other issuer did not come to market, and in my opinion, there is no liquidity any more in the corporate debt market at high risk levels,” Altman said.
The Altman Z Score has already started to move for high yield debt. Next year he forecasts what would be the historical average: A default rate of 3.3% for high yield bonds, but with significantly more stress to follow in the two following years.
He noted that with US 10-year Treasury bonds are at a 4% interest rate, while high yield bonds are issued at 9-9.5% rates in some cases, while distressed debt is at 14%.
“In 2024 and 2025 I expect there will be an explosion of defaults in the bigger company high yield bond markets, and I’m really concerned about small to medium sized enterprise (SME) market,” Altman said.
“Someone once said, never forecast; but if you do, never put it in writing; but if you do, do it frequently,” Altman added.
Banks in the US and Europe are already pulling back from lending to SMEs, he warned.
“SMEs are an incredibly important sector, particularly in Europe, and increasingly so in the US economy,” Altman added. “A big question is whether non-bank lending will step in?”
Wiserfunding then and now: How are they coping with the economic landscape and what lies ahead?
For the first time since they founded Wiserfunding together five years ago, Gabriele Sabato and Ed Altman give an interview together.
Watch it exclusively here and learn more about the past, present and future of their work.
Tackling climate risk in 2023 and beyond
Hear from experts
at RiskMinds International 2022
Valerie Villafranca, Head of ESG Operational Transformation at Societe Generale, joined us to talk about operationalising ESG strategies and how it redefines the company as a whole.
Jo Paisley, President at GARP Risk Institute, gives us an overview of how climate risk management can be done effectively while addressing the data and resource challenges this brings.
Across the four days of RiskMinds International 2022, one topic was constantly repeated as being the issue for risk managers to be aware of: Climate change.
We hosted our first (but certainly not last) climate change and sustainable finance summit, and interviewed several key speakers on their net-zero ambitions, ESG challenges and integrating climate risk into a resilient risk management framework.
Please explore our curated playlist of key insights on climate risk to set yourself and your company up for a greener future.
Climate, environmental risks or ESG: What should CROs focus on?
Why are net-zero targets important and where are banks in their net-zero journeys?
Daniel Mikkelsen, Senior Partner, McKinsey & Company
Philipp Mettenheimer, Partner,
Oliver Wyman
How ready are the banking sector to tackle climate risk?
Antonios Kastanas, Senior Director, Moody's Analytics
Energy supply crisis and transition risk: What are the main challenges?
Sadig Hajiyev, Group Risk Coordinator, SOCAR Türkiye
<a href=" https://www.baringa.com/en/insights-news/trending/climate-change-sustainability/"display:inline;">Learn more now</a>
Managing volatility and building resilience
How do you manage this much uncertainty, how are rising interest rates and a looming recession affecting CROs and why should stress testing be on risk managers' radars?
Hear from the experts at RiskMinds International 2022
Zero rate current deposits: How can banks work with them?
Jan Kowalski, Head of ALM,
Bank Pekao
How to improve model risk management: Effectiveness over efficiency
Sebastian Ptasznik, Head of IFRS9 and Non-credit Risk Validation,
Close Brothers
Mark Findlay, Global Head of Financial Risk Analytics, S&P Global Market Intelligence
Challenges for sell sides firms in a volatile market: What lies ahead?
Mark Batten, Banking Leader, PwC UK & Global Relationship Partner, and Philipp Wackerbeck, Senior Partner and Global Head of Financial services, Strategy&
Rapid changes in finance: What should risk managers and banks look out for?
Surviving and thriving in uncertainty: What can banks do?
Current challenges for financial services: Tackling the what, why and how
Claus Schunemann, VP, Sales EMEA, ActiveViam
Manas Chawlas, Political Risk Expert and Chief Executive Officer,
London Politica
The state of political risks: Changes, challenges and what to look out for in 2023
How is the market reacting to the coming adverse economic conditions?
Martim Rocha, Director and Global Head of Risk Banking Solutions Risk Research and Quantitative Solutions, SAS Institute
What makes RiskMinds International special?
Let senior risk experts tell you
why they keep coming back
If you just have time and budget to do one conference, this is the one I would recommend.
John Hull, Maple Financial Professor of Derivatives & Risk Management,
University Of TorontoWe're benchmarking where you’re heading in the risk management field, that you’re heading in the right direction and keeping up with what’s changing. Especially now with much change, it’s even more important [to come together at a place like RiskMinds International]
Lisa Palmgren, Chief Risk Officer Group, Länsförsäkringar
<a href="https://www.wiserfunding.com/credit-risk-lifecycle-solution"display:inline;">Sign up to learn more now</a>
ML for data integrity: The power of innovation
What ML techniques can be used in digital transformation and risk integration?
Alla Gil, CEO, Straterix explores
New technologies, many of them AI and ML based, are revolutionizing risk management. They are already successfully applied to consumer finance, compliance, anti-money laundering (AML), and cyber risk. However, application of these techniques to strategic risk tasks, such as allocating capital and defining risk appetite, have been lagging behind. Many senior risk management professionals are against applying ML-based models.
There are good reasons for such cautiousness.
Navigating risks in unprecedented market conditions is like playing a chess game where the rules, the number of pieces and the size of the board are changing frequently and without warning.
No existing AI methods can adapt to such environment without human intervention. But with tremendous increase of data volume, the human mind cannot possibly process all the potential combinations of dependencies, changing correlations and their consequences. Thus, the hybrid approach integrating computer power and human judgement is a must.
This is where transparent, explainable and adaptable ML methods come to the rescue.
The most efficient use of these techniques is not to replace the decision makers and model developers but to expand their intuition to cover situations that have never been encountered in the past.
Navigating risks in unprecedented market conditions is like playing a chess game where the rules, the number of pieces and the size of the board are changing frequently and without warning. No existing AI methods can adapt to such environment without human intervention.
First, the models should never be “black boxes”
It doesn’t mean they must be simple. Since the problems they are addressing are extremely complex, the answers cannot possibly be too easy. Addressing such complex issues can be done in two possible ways. One is a black-box solution trained on big data and suitable for algorithmic or high frequency trading, fraud detection and other split second-based decisions. It doesn’t work for decision making. This is the main reason for not using ML-techniques in strategic risk management. The other solution is the modular approach where the inputs and outputs of each module are observable and intuitive. They can be verified, challenged, and controlled (or corrected) by modelers and business experts.
This means using the data prior to a crisis, calibrate models and project model outcomes through the crisis period. Then compare these results against the actual historical performance as shown in Figure 1.
Second, the models must be backtested
Figure 1. Backtesting Model Results Against Historical Outcomes
Source: Straterix
And finally, the modeler and business expert can verify the risk drivers suggested as explanatory ones using ML-based methods such as regression with regularization.
They can reject the variables that they view as spurious and review the results. If goodness of fit substantially declines after such rejection, it tells model developers that they might have overlooked the variables explaining the outliers and other major deviation from the historical trends. At the same time, exhaustive cross-validation embedded in such ML methodologies helps reduce dimensionality and avoid overfitting.
This approach expands the modelers’ limited experience in the new market regime, while still offering them the flexibility to test, accept or reject the drivers suggested by the ML algorithm.
At the same time, exhaustive cross-validation embedded in such ML methodologies helps reduce dimensionality and avoid overfitting. This approach expands the modelers’ limited experience in the new market regime, while still offering them the flexibility to test, accept or reject the drivers suggested by the ML algorithm.
Once the risk drivers have been identified and equations driving revenue segments, loan levels and deposit volumes have been estimated, the full range scenario analysis can be applied.
It consists of a combination of advanced simulation techniques that incorporate market, credit, climate and operational shocks and the ripple effects of these shocks that naturally produce historically unprecedented scenarios.
The next steps include reverse scenario analysis and the use of clustering techniques to identify early warning indicators (EWIs).
This means identifying the variables that are highly correlated with the specific KPI outcomes (like stressed capital and liquidity ratios) a few quarters prior to the realization of such outcomes.
This enables the risk managers to analyze these EWIs and proactively develop contingency plans. Figure 2 demonstrates an example of a heatmap that depicts correlations with the 99th percentile worst-case tier I capital ratios of a bank.
Figure 2. Heatmap with the Correlations between KPIs and Risk Drivers
These explainable and transparent ML technologies can have great immediate impact on risk management processes and help adapting to extreme economic and market uncertainty.
Alla Gil is co-founder and CEO of Straterix, which provides unique scenario tools for strategic planning and risk management. Prior to forming Straterix, Gil was the global head of Strategic Advisory at Goldman Sachs, Citigroup, and Nomura, where she advised financial institutions and corporations on stress testing, economic capital, ALM, long-term risk projections and optimal capital allocation.
The current environment of unprecedented uncertainty presents a perfect opportunity for accelerating digital risk initiatives without overreliance on technology. Risk and finance functions of organizations must reconsider what factors are driving their revenues and what scenarios they should select for stress testing their capital and liquidity positions. In the process, they need to answer the following questions: 1) What are the proper data mining and machine learning techniques that can be used by risk managers to support the development of new models? 2) How to identify the outdated models? 3) How to combine the modeler’s expertise, experience, and intuition with ML-based outcomes?
From marginalised to ‘mainstreamed’: Reputation management in the era of ESG
PwC spoke to highly experienced professionals in the field of corporate communications and sustainability to understand how the fast-developing ESG agenda is affecting reputation management
We discovered that ESG has had a major catalysing effect on reputation management, bringing good practice in from the side-lines to the centre of business strategy and activity. As the paper outlines, it is also creating better issues management governance, changing the stakeholder conversation and evolving the communications function.
Both through soft interventions (the rapidly changing social dialogue) and hard interventions (regulations, ratings and investment), ESG puts the focus on organisations doing good business. They need to evolve and improve in these areas, not only because it helps long-term profits and to meet regulatory compliance, but because it is in the interest of stakeholders and society at large.
Reputation and sustainability are intrinsically linked. In depth conversations with several corporate affairs, sustainability, and communications leaders reveal how organisations are changing – or need to change – to successfully manage reputation in the era of ESG. These insights are explored, with recommendations, in our paper.
We discovered that ESG has had a major catalysing effect on reputation management, bringing good practice in from the side-lines to the centre of business strategy and activity.
Our view is that the two are intrinsically linked. Get your approach to ESG right, and you are well on your way to protecting and enhancing your reputation. Get it wrong, and you can damage your brand and erode stakeholder trust in your organisation.
Encouragingly, we picked up a general positivity about ESG and its effect on organisations and beyond. Whilst it comes with risks, like greenwashing, which need to be identified and managed, it is generally viewed generally as a positive development. As with anything that helps organisations focus on their key asset – their reputation – this is to be wholeheartedly welcomed.
Effective strategic risk management
By Kyria Ali, Chief Strategy & Development Officer, NAGICO Group of Companies
Risk Management can be described simply as the management of risks.
It is reasonable therefore to expect that Strategic Risk Management would be described as the management of strategic risks, and persons and businesses do explain it in this manner. However, as a professional with certifications in both Strategic Management and Enterprise Risk Management, that is active at the C-Suite/ Executive level of the business, I view Strategic Risk Management slightly differently.
I believe it is better to approach this concept from the perspective of: the management of risks in a manner that is focused on assisting the business with the achievement of its strategic goals.
Having had the benefit of wearing the Chief Risk Officer hat at one stage in my career, followed by Chief Strategy and Development Officer and also Interim CEO, my lens was magnified, and my perspective broadened.
What came to light was how much easier it was to achieve business goals, and to progress plans, with a blend of strategic business and risk management technical competences and experience at the table. The focus of the Executive team was on the big picture. What were we trying to achieve? Why? What risks could impact our success?
Could we avoid, mitigate or manage the risks? What was the potential upside and downside? How did this compare against our risk tolerance levels and appetite?
This type of thinking and collaborative practice is what I consider to be Effective Strategic Risk Management and I encourage all risk management professionals to give this a try.
It is a shift in mindset which moves everyone onto one page, with a common goal; i.e. the achievement of the company’s strategic objectives and KPIs. It is a forward looking and proactive approach.
What came to light was how much easier it was to achieve business goals, and to progress plans, with a blend of strategic business and risk management technical competences and experience at the table.
This approach requires businesses to either establish a new dimension to its risk management department or refocus a part of it. The new or refocused part should be dedicated to serving and supporting the operational leaders, in an agile manner, with the identification of opportunities and development of suitable strategies to achieve targets/goals after having duly interrogated and considered the related risks as well as quantitative and qualitative insights. It is worth mentioning that a by-product of this practice is that the risk management department becomes more of a strategic business partner and thus is able share the feeling of fulfilment when objectives are achieved. It is important to note however, that the traditional risk management role remains very relevant and important, thus it must be maintained.
So how can you help your business improve its overall success rate and increase its resilience with this manner of effective strategic risk management? First off, you should advocate for the integration of business strategy and strategic risk management. This would require governance and framework revisions and policy and procedure development, to create an appropriate infrastructure. In addition, personnel changes or the introduction of a new profile may be required to bridge the gap between the 1st and 2nd lines of the business: operations and risk management; a Strategic Risk Officer or Strategic Risk Manager.
It is worth mentioning that a by-product of this practice is that the risk management department becomes more of a strategic business partner and thus is able share the feeling of fulfilment when objectives are achieved. It is important to note however, that the traditional risk management role remains very relevant and important, thus it must be maintained.
Under the Gartner definition, IRM has certain attributes:
1. Strategy: Enablement and implementation of a framework, including performance improvement through effective governance and risk ownership
2. Assessment: Identification, evaluation and prioritization of risks
3. Response: Identification and implementation of mechanisms to mitigate risk
4. Communication and reporting: Provision of the best or most appropriate means to track and inform stakeholders of an enterprise’s risk response
5. Monitoring: Identification and implementation of processes that methodically track governance objectives, risk ownership/ accountability, compliance with policies and decisions that are set through the governance process, risks to those objectives and the effectiveness of risk mitigation and controls
6. Technology: Design and implementation of an IRM solution (IRMS) architecture
Kyria Ali is Chief Strategy & Development Officer at NAGICO
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