On the week of 14th June 2021, I attended the RiskMinds In Focus event on Managing Uncertainty, Managing Technology, Managing Regulation, and Managing Climate Risk and ESG.
The virtual event was an excellent opportunity to learn first-hand from risk experts about the future of risk and compliance and interact with other attendees while exchanging ideas. I highlighted four ideas that caught my attention from the event below:
- Managing Uncertainty - In these uncertain times, we need to understand the risk landscape better
- Credit risk and systems – How are models advancing in the new normal after the pandemic
- Second Generation risk models – How models impact in key decisions
- ESG Stress testing why it matters – ESG Stress testing is critical to understanding the risk market uncertainty
In these uncertain times, we need to understand the risk landscape better
In this age of increasing risk management frameworks, financial institutions require dynamic and flexible risk management to navigate an unpredictable and uncertain future where change happens rapidly. As we move into a post-pandemic world, risk managers will face challenges surrounding complex models and demanding stress tests. Andrew Cross, Managing Director of Cross Risk Consulting, emphasized that managing uncertainty will be the risk manager’s job, and understanding the risk landscape will be critical for future success.
How are models advancing in the new normal post-pandemic
In this panel led by Professor Stefano Bonini, Professor at the University of Bologna and Lumsa University, he highlighted that growing data and new technologies are forces that will reshape credit risk modeling. Other key factors affect how models are validated such as digital disruption and regulatory pressures in the context of a post-pandemic world. Due to these growing pressures, European banks are expecting big problems in the coming months if we ignore the changing model landscape. Banks are considering credit risk as one of the biggest challenges going into 2022. With credit losses at an all-time high, banks will have to invest more time and capital into their credit models than ever before.
With the introduction of KPI (measures of current risk) and KRI (measures of forward-looking risk), Professor Bonini highlighted that focus should be shifted to credit risk such as macroeconomics projects. Another area of focus should be balance sheet forecasting. Professor Bonini advises that instead of using past financial statements for forecasting, financial institutions should use 2-3 years of forecasting to get an idea of what is on the horizon. And finally, ESG (including ESG analysis to forecast future credit sustainability) will be a mandatory requirement after the pandemic.
How Model risk impacts key decisions
In the panel led by Rita Gnutti, Executive Director of Internal Validation and Controls and Group Chief Risk Office Area at Intesa Sanpaolo mentions that model risk is a key issue for all banks and should not be taken lightly. Model risk has become an important part of any banks’ framework, and as a result, leadership should implement it to get a better view of their progress. Banks should also look at improving the models report to improve the quality of internal and regulatory reporting. However, we should not take our eye off the ball since model risk governance frameworks and model landscaping are still key areas of concern for banks that do not have the resources to accurately report their findings. Gnutti highlighted that model owners and model reviewers are key people within banks and should be prioritized over other areas. Due to the increasing amount of regulatory pressures, regulators require that key credit models and counterparty credit models be considered as key aspects of validated models.
ESG Stress testing is key to understanding the risk market uncertainty
ESG and climate risk stress-testing will be the key to fully understanding risk market uncertainty. As discussed in the panel, we need to find next-generation models or second-generation models that can be used with various other models during stress scenarios. Another key area of focus going into 2022 will be on reverse stress-testing, making business functions more robust by starting from an outcome and pinpointing key challenges. Many banks and financial institutions suffer from losses when they do not focus on these challenges.
To learn more about risk management in a post-pandemic world, contact MRMSolutions@evalueserve.com.