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Risk management needs integration with banks’ business models
CRISIL GR&A roundtable identifies three key issues in risk management
Participants at the conference included regulators, banks, asset managers, legal firms and corporates. Dr. Colin Lawrence, Director, Prudential Risk Division, Financial Services Authority, UK, delivered the keynote address on ‘Risk Regulation - Current Issues and Trends’. Discussions at the conference centred on the gaps in the risk management processes prevailing at most global banks against the backdrop of evolving regulations. The conference was organised by CRISIL GR&A — the foremost provider of end-to-end risk and analytics services to trading and risk management functions at the world’s leading financial institutions and corporations.
The risk management processes at banks need to be better integrated with their business and operating models. For this, risk management needs to be viewed as a key part of strategy and operations and go well beyond merely being a compliance exercise. There is a need to incorporate risk-based capital performance measures and stress testing more centrally into business decision-making processes.
Banks have begun stress testing their portfolios but need to do more in the area of integrated stress testing, including market, credit, liquidity and operational stress testing. Stress testing also needs to be forward-looking, with several tail risk scenarios and take into account the inter-connectivity of the global financial systems and economies. Sanjeev Sinha, President, CRISIL GR&A says, “The outcome of integrated stress testing scenarios should be a key input for the management and boards of banks while deciding on their risk appetite, capital and liquidity planning.”
There is a growing need for strengthening risk management by improving data availability and risk analytics. Lack of consistent and complete data prevents accurate risk computation. Regulators like the US Federal Reserve (Fed) disregard stress testing submissions of banks if they are not based on robust data — in such cases, the Fed uses its own assumptions based on industry averages. Moreover, despite past failures there is still an over-reliance on traditional measures of risk such as Value-at-Risk (VaR). VaR is not useful in planning for extreme events as it measures the maximum possible loss within standard operating conditions. Banks need to emphasise newer techniques such as reverse stress tests. Explains Gurpreet Chhatwal, Senior Director and Global Head, Risk and Analytics, CRISIL GR&A, “Reverse stress tests can help banks identify a range of adverse circumstances which could cause business failure and help develop mitigation plans. It is also important that the limitations of models being used at the banks are fully understood.”
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About CRISIL Limited
CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services.
We are India’s leading ratings agency. We are also the foremost provider of high-end research to the world’s largest banks and leading corporations. With sustainable competitive advantage arising from our strong brand, unmatched credibility, market leadership across businesses, and large customer base, we deliver analysis, opinions, and solutions that make markets function better.
CRISIL’s majority shareholder is Standard and Poor’s(S&
About CRISIL Global Research & Analytics
CRISIL Global Research & Analytics (GR&A) is the world's largest and top-ranked provider of high-end research and analytics services. We are the world's largest provider of equity and credit research services. We are also the foremost provider of end-to-end risk and analytics services to trading and risk management functions at the world's leading financial institutions and corporations. We operate from research centers in Argentina, China, India and Poland, working with our clients across several time zones and in multiple languages. Being part of CRISIL enables us to attract and retain top-quality talent. We have over 2,300 employees, 75 per cent of whom hold advanced degrees in finance, accounting and management. We employ the largest number of CFAs and CFA aspirants in India. For our robust talent development practices and compelling employee value proposition, we won top honors at the NASSCOM Exemplary Talent Practices Award (NExT Practices) for Skill Enhancement and special recognition for the ‘Talents Magnet Category’ in 2011 and 2012 respectively. The award recognizes us as a firm that has the vision to proactively invest in its people and get them future-ready. We are committed to delivering cutting-edge analysis, opinions, and solutions. This underscores our proposition of being the best people to work with.