Looking ahead to RiskMinds International, we invited rising stars of the risk management industry to participate in FutureRiskMinds. Here, Claire Lebon, deputy head of Credit Impairment and IFRS9 at Société Générale discusses how she sees the future of risk developing:
Managing risk is supposed to be the basics of the banking industry and has existed since the creation of the banking system. Therefore, how can we explain that articles and conferences about risk management have spread all over the banking industry over the past years? In a context of rising risks both in the financial markets and in the global economy, risk management became a key success factor for banks which organized themselves to cover all types of risks in a more systematic way. Risks that were uncovered before, such as reputational risk, appeared in global cartographies with new words being repeated all day long. Who knew what lines of defense were 10 years ago? We have now become so familiar with it that we never use the full name anymore but rather gossip about LoD1 and so on. Risk management is part of the banking culture in a much more organized and global way than 10 years ago.
So is this it? Should we consider that risk management is now mature and should only go on as it is? Of course the answer is no. First of all, new risks that we do not know about today will appear. We can see the climate risk growing and we probably do not know what the new rising risk will be. But according to me, the main urgent challenge for risk management today is to gain a cross department vision for risks that share the same root causes.
So is this it? Should we consider that risk management is now mature and should only go on as it is? Of course the answer is no.
Let’s take the example of models used to predict the probability of default of counterparties. Sophisticated models were developed in order to calculate capital requirements under advanced approach. These models were internally reviewed by departments that checked that the models were in line with the Basel framework. These models were built on a preexisting framework of ratings that was used for granting purposes, with risks properly identified in case of a misjudgment on a rating. The probability of default model itself can be used for granting purposes to check the profitability of clients considering their risk of default. Identifying and quantifying the model risk cross usages became more difficult.
With the introduction of IFRS9, these models have been modified to comply with the requirements of this new accounting standard, including the development of forward looking projections. These updated models will have an impact on the financial statements. And these forward-looking probabilities of default can also be used for risk appetite statements and internal or external stress testing exercises. The same models developed for regulatory purposes are used for in different contexts and are always slightly adapted to meet the needs. These models can be used by different departments that do not know the details of the models and the modeling department can struggle understanding the detailed usages of their model.
The challenge of risk management today is to suppress the still existing silos for risk management purposes to develop cross department analysis
This highlights the need to carefully pre-identify cross department usages in the model risk management analysis knowing that an error in the model can have impacts on all these different areas. These impacts can be materially different as the models have always been adapted to cover the needs but they can create massive impacts when joined together. This example is just one at of many of cross departments risks that can be under estimated when analyzed separately.
Therefore, after years of developing risk culture everywhere in the bank, the challenge of risk management today is to suppress the still existing silos for risk management purposes to develop cross department analysis to properly identified closely related risks covering different areas of the bank.
