As part of our FutureRiskMinds series, we invited up and coming leaders in the risk management industry to present their vision on the future of risk management. Here's what Rob Tuffnell, Director of Credit Risk Management, Europe & Asia, CIBC World Markets has to say:
In the field of credit risk, the much used phrase by Greek philosopher Heraclitus “change is the only constant in life” is becoming progressively more prevalent as disruption takes hold across multiple industries, making extending credit over a longer time period and placing reliance on uncertain forecasts, increasingly difficult.
Whilst newspaper column inches focus primarily upon the impact of technologies driving the fourth industrial revolution, disruption comes in many forms, and is starting to impact historically non-cyclical and stable industries, where from a risk perspective, you probably wouldn’t have expected to encounter significant losses.
We need to understand whether people in our institutions know what disruption looks like.
Our world is in a state of flux. As well as political uncertainty and technological advances, society as a whole is facilitating an environment where disruption can thrive. By way of example, millennials drink less alcohol, and embrace technology more than their elders did. Consequently coffee shops have replaced pubs on the high street, and app only banks are breaking down the market share of their bricks and mortar peers.
So how can you approve 5 year money in such an environment? Even if we approved now, would we approve a refinance request in the future? Are the forecasts supporting a request actually any good?
None of us have a crystal ball, and we are always susceptible to one off events catching us by surprise (e.g. impact of 9/11 on the aviation industry). Disruption is therefore a given. But whilst disruption is perceived as a progressive and futuristic event, as risk professionals, adhering to proven and well-established mitigation strategies will help us manage disruption head on.
Looking forward 10 years and anticipating changes as to how we might lend, driven by wider disruption, should be embedded into the company culture, and not just a box to tick in credit applications.
The ‘three line of defense’ model is vital in our efforts to do this. We need to understand whether people in our institutions know what disruption looks like. Do we question our clients as to how they will cope with change? Do our clients employ the right people to navigate this change? Are they playing an active part in adapting to change, or are they heading to the corporate graveyard to join the likes of Kodak and Blockbuster Video? Speak to those we lend to and ask sensible yet challenging questions. If our first line is not doing this, it is the role of the second line to speak up and ask them to do so.
As individual institutions we should constantly question whether our credit policy remains relevant, to ensure we are proactive towards disruption. Rather than wait for the first loss, anticipate which clients and sectors may be most vulnerable and act accordingly. Techniques first encountered in the classroom such as SWOT and Porter are key to understanding which segments of our portfolios are likely to be hit first. We can then change and influence policy and lending guidelines accordingly.
Finally, engagement across all lines of defense is key. Looking forward 10 years and anticipating changes as to how we might lend, driven by wider disruption, should be embedded into the company culture, and not just a box to tick in credit applications. Asking questions and making decisions now when the impact may or may not materialize can be difficult, but is for the long-term benefit of our stakeholders and shareholders.
