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Three Trends Driving the Evolution of Risk Management

By Andrew Gray, DTCC Group Chief Risk Officer | June 12, 2018

Three Trends Driving the Evolution of Risk Management

Recently, I spoke at the Tsignhua PBC School of Finance Global Finance Forum in Beijing on the trends impacting risk management and what it means for the industry and investing public. The conference this year focused primarily on financial reform and stability with an emphasis on trends related to finance in China. The Global Association of Risk Professionals (GARP), of which I serve on the Board of Trustees, and the Tsinghua University PBC School of Finance (PBCSF) invited me speak, and I saw it as a great opportunity to share information on the ways in which our industry has been evolving since the 2008 financial crisis and how we’re responding to these changes to protect the safety and integrity of the global marketplace. This event continues to grow in stature thanks in large part to the leadership provided by Tsinghua University and the PBCSF in raising issues that are critical to the future of banking in China.

Trend #1: The Expanding Remit of Risk Management

The first trend I highlighted is the expansion of the risk management function in response to a confluence of factors and external dynamics, including the fallout of the financial crisis and the accompanying regulatory response, the explosion of new technologies and the growing interconnectedness of global markets.

At the same time, we’re also witnessing a transformation in the nature of risk itself, with new threats emerging from a wider range of sources than ever before. For example, cyber-attacks, which barely registered as a grave concern a decade ago is consistently ranked as today’s number one risk facing the global financial system, according to DTCC's Systemic Risk Barometer.

In an environment of such rapid change, the risk management function has expanded its scope from overseeing credit, market and liquidity risk to now managing operational, systemic, technology, information and physical security risks. With a broader set of issues under our purview, risk managers have had to refresh their approach and mindset to take a more comprehensive view of risk.

We also need to manage and mitigate risks within our own four walls as well as risks that extend beyond the boundaries of our own individual institutions. Given the interconnectedness of financial markets and the growing complexity and unpredictability of risk, we need to apply a system-wide view to the risk landscape and recognize that risk is distributed across the system and not always in ways that are completely transparent.

Trend #2: The Importance of Building Resilience

The second trend I discussed was the critical need to build resilience to protect market stability. Because of the openness and complexity of the modern financial ecosystem, it’s inevitable that breakdowns will occur. Today, it’s a question of when, not if, this will happen. As a result, strengthening resilience against systemic shocks is more important than ever.

In the financial sector, firms can no longer focus solely on measuring, analyzing and mitigating risk. We have to be able to detect problems and recover from them efficiently and effectively, minimizing contagion and ultimately learning from these events.

To achieve a greater level of resilience, organizations must start by establishing the right culture. This applies not just for the risk and control functions, but across the entire enterprise. All employees, regardless of level or title of role, need to establish a resilience mindset – with an emphasis on thinking through potential risk events, using scenarios based on real or hypothetical examples and fully grasping what can be done to proactively prevent risks, minimize damage and recover quickly.

Trend #3: Fintech Will Transform Risk Management

The third trend I spoke about is the transformative impact of financial technology – or fintech – on how we manage risk. Fintech has a critical role to play in mitigating risk and building resilience. Central to this role is a data-driven approach to managing risk and using new innovations to more effectively identify and respond to the wide range of risks the industry faces today. Financial services has become proficient at collecting reams of data, but the bigger question is: can we effectively manage and interpret all of it?

Big data analytics and artificial intelligence can help organizations mine their data for actionable intelligence to identify risk, including extreme but plausible events that could spark contagion or create systemic shocks.

For example, machine learning has the potential to enable analysts to look at operational and incident data to identify trends and possibly prevent future disruptions. Models could also be used to determine the financial resources required for stress events using unsupervised learning techniques.

Connecting all these new technologies will help us to create an architecture to support what we call "intelligent resilience." The foundation of this is a data lake, which would be comprised of structured and unstructured data capable of capturing all aspects of risk and enable real time monitoring. This data lake could extend across boundaries, provided the right controls are in place, to help our clients have access to their slice of the same data and to support a broader systems view. While many of these ideas are only theoretical or in their infancy right now, we believe fintech holds enormous potential to transform how risk management is practiced.

Read: Fintech Opens Possibilities to Building Intelligent Resilience

While the industry has made tremendous progress in recent years in the three areas I mentioned, there is still work to do to ensure we are prepared to protect against the many new risks we face. At the heart of these efforts is the need for financial firms to continue innovating how they manage risk in order to build resilience.

You can read my full remarks to the Tsinghua PBCSF Global Finance Forum here.