The term "future of risk management" means different things for different people, and the FutureRiskMinds series has welcomed the view of many young risk managers as they discuss what they think. Alesia Khudnitskaya at Deutsche Bank, tells us what she thinks the future has in-store.
I would like to share a very futuristic view on the prospective of risk management given some basic Game Theory concepts and modern Macroeconomic theory. In particular, the future of risk management is to ‘go global’, be consistent and have a higher level of collaboration with regulatory institutions. This involves creation of the global risk platform which is developed and used jointly by the risk professionals within financial institutions and regulatory institutions.
The risk platform will act as an auction where the best risk methodology offers are competing to win the place in the respective regulation issued by regulatory institutions. Technically, this is maintained as a sequence of consecutive steps. Firstly, all participants of the global risk platform (financial or regulatory institutions) contribute their best risk management practices/models to the wider audience for review and validation using the global shared data pool. Secondly, the statistically robust risk models and approaches win the auction based on the votes of all participants. The leading methodology contender is then planned to be incorporated in the respective regulation by regulatory institution. Finally, the global risk platform implements the model and releases it for the use of the broader audience. In this way the whole risk management framework can benefit immensely: one can view it as maximization of the joint utility functions of financial and regulatory institutions.
Financial institutions can benefit from such global collaboration by:
- Saving on the cost of internal model implementation as the global risk platform will offer risk calculation engine to all participant on a shared cost basis.
- Using shared data pool will help to widen the model backtesting by providing the rigorous and extensive data universe, which is essential for robust model methodology development.
- using more advanced models can help save on capital by capturing the risk more efficiently.
Regulatory institutions can benefit from it by:
- Saving the cost on their own analysis: as soon as the financial institutions are interested in developing more rigorous risk models to save their capital, they actively submit methodology offers including providing the empirical justification, back-testing results and evidence that the approaches are robust using global shared data pool – full data universe in this case.
- Substantially decreasing the transaction cost as a result of doing only one model validation and audit of the global risk platform rather than individually for each financial institution.
- Increasing the consistency of the applied approaches brings more transparency in risk measurement and calculation.
- Maximizing the utility of smaller financial institutions who will be leveraging the global risk platform for advance techniques for risk measurement and management.