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Matching prescriptive regulation with your risk appetite

Future risk

Here, Marius Naudin, Trade Floor Risk Management – Rates & Fixed  Income at Scotiabank, tells RiskMinds365 his vision of the future of risk management. 

Two trends will drive the future of risk management. First, increased regulation and external scrutiny will broaden every risk person’s role in the bank. With banks trying to lower costs across the organisation, risk managers will therefore be asked to do more with less; this will in turn lead to the risk function being a driver of digitalisation.

Scrutiny of banks since the financial crisis has been driven by the public and governments’ desire to eliminate ‘too big to fail’. This has led to a whole suite of new regulations and laws being enacted across jurisdictions. In the past, regulation was more general and less rigid so internal risk framework was where the focus was. Now that regulators are more prescriptive and have defined quantitative limits for some risk metrics, this could lead to a standardized risk management where firms deem regulatory standards as substitute for internal risk appetite, framework and monitoring.

The challenge for risk will be to marry a prescriptive regulation with the bank’s own specifics and risk appetite.

Risk managers will therefore need to have a strong knowledge of new regulations, and not just be a pure technical and financial expert; compliance and regulation will need to be on every risk person’s mind and agenda and will probably drive a lot of future risk-taking decisions. If that sounds like an additional burden and a drag away from the core aspect of market risk management, it’s going to be an opportunity for the risk function to raise its game. New regulations will be applied at all levels (business lines, desks, books), therefore we will need to broaden our expertise to help risk-takers manage new costs, risks and rules; even if central project teams oversee new regulatory initiatives.

Risk will have to achieve more – with less given banks’ increased focus on reducing costs. The solution for risk management is to be a driver of the bank’s digitalisation. The first step was to digitize, i.e. collect and store efficiently large amounts of internal and external data. Banks can then leverage off ever faster processing power and new cloud-based services to digitalize its processes through big data and machine learning. In other words, the only viable future is to become a digital bank. Risk management teams will then be able to reduce the time allocated to producing risk reports and to spend more time on using the data and delivering insights, therefore speeding up the decision-making process. Risk will also be able to identify and analyse promptly new market trends and evolution (for example liquidity drying up, or a central bank stepping out of a market). Static frameworks and limits can then become dynamic and risk will be empowered to be less of a backseat driver and more of a complement to the business. This will be critical for risk in a context of increased geopolitical uncertainty and increased volatility on the markets.RiskMindsInsurance_Disruption_and_Innovation

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