Maybank guru kl 2014 emerging risks in banking marc ronez presentation_ss

ARiMI – Asia Risk Management Ins0tute

By MARC RONEZ Chief Risk Strategist & Knowledge Leader ARIMI-Asia Risk Management Institute

NOTES

MAYBANK – Gurus Series KL 14th November 2014

Emerging Risk Issues in the Financial Services Industry & for the World Economy

Agenda for this Session þ Clarifying the Concept of Emerging Risks and

understanding its Relevance for the Financial Industry.

þ Review of a few Key Emerging Risk Issues that should be on the radars screen of Financial Institutions.

þ Exploring the approaches available to help organizations to prepare for and manage Emerging Risk Issues.

Marc Ronez -Emerging Risk Management - Copyright @ ARiMI 2014 2

1 – Clarifying the Concept of Emerging Risk & understanding its Relevance for the Financial Industry


Defining Emerging Risks

The Definition of Emerging Risk is still subject to many debates.. Our definition is as follow:

“A newly developing or changing risk issue that could be potentially very significant in terms of overall IMPACT on an organization, an industry and the economy BUT .. ..which is NOT properly and fully understood in terms of frequency, consequences, velocity, reserving/capital setting and so on.” Marc Ronez -Emerging Risk Management - Copyright @ ARiMI 2014 4

2 Types of Emerging Risks

1.  Completely New Risk Issues that have never been seen before. (Examples: Risks associated with any Technological innovations such as GMOs, Internet,..- Societal/cultural changes)

2.  Previously Known Risk Issues that are Evolving in unexpected ways with unanticipated consequences. (Examples: Risks associated with changes in U.S. home subprime mortgage market – Changing nature of terrorist threats)


Example: Changes in the TransportaBon Industry -‐Technological InnovaBon from Horses to Cars

Types of Changes: Incremental vs Transformational


Since the beginning 1880s 1910s 2000s

Horse drawn vehicle

First Cars Modern Cars Mass Production On foot


“The Threat of terrorist attacks in the United States should be considered low!” Statement by a White House Official, in August 2001

On the 9th September 2001, Al-Qaeda successfully launched the worst terrorist attack on American soil killing almost 3,000 people.

Example: Changes in the GeopoliBcal Environment -‐ Rise of & Changing Types of Terrorist Threats


‘Emerging Risks’ versus ‘Black Swans’ events

What is the difference if any?

The Black Swan Theory


Theory developed by Nassim Nicholas Taleb (finance professor, former Wall Street trader & philosopher) in his bestseller book published in 2007. To explain Human Blindness to Risk posed by highly improbable events & highlight the importance of these events in human history.

Black Swan DefiniBon

¤  Nassim Taleb defines a Black Swan event as follow:

1.  It has never happened before or extremely rarely (highly improbable events, outliers).

2.  Its take people by surprise as they never imagine of such an event occurring (The Turkey Syndrome)

3.  it carries a massive TRANSFORMATIONAL impact

4.  After its first occurrence, the event is rationalized by hindsight, as if it could have been expected even so it was not (Narrative falsification).



‘Emerging Risks’ versus ‘Black Swans’

A ‘Black Swan’ is an Emerging Risk Issue

That has not been properly identified & hence prepared for!

WHY Should you care about Emerging Risks & Black Swans CHANGES?

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3 Main Reasons:

1.  It can DESTROY your Organization your organization if NOT appropriately managed

2. On the contrary, it can lead to tremendous OPPORTUNITIES if well managed

3. Even with ‘negligible frequency’, What can happen, will happen! (Murphy’s Law)

2 – Review of Key Emerging Risks Issues that should be on the radars screen of Financial Institutions



The only Constant in Life is... The Certainty of CHANGE

KEY Drivers/factors: OrganizaBons face a COMPLEX, UNCERTAIN always CHANGING environment

Human & Social Factors

Political & Regulatory

Climate

Resources & environmental

Factors

Economic Environment & market Forces


Technological innovations

Source of both Risks & Opportunities

Global

Domestic

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The importance of IDENTIFYING the Key Long-‐Term TRENDS of changes in today’s world

Marc Ronez -Emerging Risk Management - Copyright @ ARiMI 2014

EMERGING RISKS : Categories and Key Issues according to the World Economic Forum


EMERGING RISKS: Key Issues for the Financial Industry 1 to 15 years + Horizon (ARiMI perspec0ve)


Cyber attack, IT failure

Disruptive Technological &

Business Innovations

Terrorism

Regulatory changes

Human Capital

Challenge

Political /Social upheaval, war

Business Ethics, Fraud

Customer changing

expectations Credit Availability

Infectious Diseases

Potential Impact & Onset Speed of Emerging Risk Issues (Scale description)

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Potentially catastrophic financial, reputational and/or regulatory impact or critical stakeholder concern

Potentially significant financial, reputational and/or regulatory impact and/or important stakeholder concern

Potentially moderate financial, reputational and/or regulatory impact and/or moderate to low stakeholder concern

Description


HIGH

MEDIUM

LOW

Potential Impact

1 to 5 years: Immediate response

required

5 – 10 years: Time to get

ready

> 10 years: Prospective

planning

Onset Speed (Range start)

Regulatory pressures & fragmentaBon


Potential Impact HIGH Onset Speed 3 to 10 Years

The implementation of policy reforms by individual jurisdictions around the world reveals increased fragmentation of regulation and markets, threatening to reverse progress toward a more global and coordinated financial services sector and putting a lot of pressure on Banks business model.

Cyber aZacks/sabotage


Potential Impact MEDIUM Onset Speed 1 to 5 Years

“..foreign governments, criminal syndicates and lone individuals are probing our financial, energy, and public safety systems every day ... Taking down vital banking systems could trigger a financial crisis.” USA President Barack Obama

Unresolved sovereign debt crisis

Ongoing sovereign debt crises are likely to cause widespread liquidity and growth problems, which may ultimately result in shrinkage of the global financial market. Investors in government bonds are also directly exposed through their securities holdings.



Human Capital Challenge


Potential Impact HIGH Onset Speed ongoing

Chuck Prince, Former CEO Citi Group

Dick Fuld, Lehman Bros

Alan Greenspan, Chairman FED

Kweku Adoboli,$2.3 billion loss UBS

Jerome Kerviel, Lost $6.9 billion Societe Generale

Bruno Iksil, Lost $6.2 billion for JP Morgan

Bernard Madoff $50 billion Ponzi scheme

Bob Diamond, Barclays

Banks are too often Recruiting & promoting the wrong kind of people

Consumer protecBon & growing liBgaBons

Strengthened consumer protection measures and changing customers expectations & behaviors with the demonization of banking will result in claims and litigation costs far in excess of what could have been expected.



Increasing economic inequality & social unrest



Violent social unrest can crop up suddenly and may spread rapidly, especially with the help of social media. Resurgence of politically motivated terrorism and move towards more totalitarian forms of governments.

Emerging infecBous diseases & pandemics

A virulent pandemic could potentially cause shocking level of deaths, months of absenteeism and tremendous economic disruptions



DisrupBve Technological InnovaBons



The Rise of Mobile Banking will completely transform the Banking industry business and operating model

“How to gather, manage & use information will determine whether you win or lose..”

Bill Gates, Founder Microsoft

Big DATA threats & opportuniBes



3 – Exploring approaches available to help organizations to Prepare for and Manage Emerging Risks Issues


Nassim Taleb, Author of the “Black Swan Theory”


“Black Swan events are almost impossible to predict.. So instead of perpetuating the illusion that we can anticipate the future, risk management should focus on trying to reduce the IMPACTS of the threats we don’t understand”. ”

HOW to Deal with Emerging Risks / Black Swans?

¤ Do not waste your time trying to to predict Black Swan Events occurrence,

¤ But Instead BUILD:

þ Organizational RESILIENCE against the negative ones that will occur and

þ  the CAPABILITY to LEARN & ADAPT to exploit positive ones to create new opportunities for growth and profitability.


Build RESILIENCE & SUSTAINABILITY into your Systems & Culture

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1.  Continuous Strategic Anticipation 2.  Organizational Agility & Capability

Responsiveness 3.  Continuous Learning


Focus more on Strategic Anticipation instead of looking solely at the Past

Time

Range of Possible

FUTURE(S)

Threats

Performance

Opportunities


TODAY Past TRENDS

1 -Traditionally Risks are assessed largely reactively based on past data 2 – instead Thinking in

terms of prospective scenarios analysis must play an increasingly important role

The ObjecBve of Risk Management is that …

.. an organisation takes risk KNOWINGLY and manage risk exposure INTELLIGENTLY

.. in a controlled (or balanced) manner so that the business is viable for a longer term (SUSTAINABILITY) while meeting the expectation of all the relevant stakeholders by CREATING SHARED VALUE (i.e., shareholders, customers/policyholders, employees, regulators, rating agencies, suppliers, etc).


SP – Strategic Planning Develop opportuniBes

& create value

BCM – Ensure Business ConBnuity & Societal

Security

INTELLIGENT ERM with Strategic Planning, OperaBonal Management & BCM

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- +

Target Performance

Expected Potential Losses

Expected Potential

Opportunities

Unexpected Catastrophic

Losses

Transformational Blue swans


Catastrophic Losses

Black swans

Unexpected Opportunities

ERM – Create Shared Sustainable Value

LOSS

OperaBonal Management

GAIN

Road Map to Managing the Risk Life cycle from Emerging Risk Issues to Crisis


Coping with Black Swans - Don’t Swim Naked! þ Think Long-term as you are in the long run (business

model & adequate financing) þ Build in Redundancies for important resource & process þ Restrict drastically the use Financial Leverage – to avoid

exposure to large losses þ Save for Rainy Days (create buffers in ‘good times’) þ Recruit and promote the right people & culture þ Develop a real Risk-adjusted Performance Management

system – to motive people to take risk effectively þ Nurture a Risk-Aware Culture to support resilience & the

capacity to Learn and Change þ Strengthen your crisis management & business continuity

programs & Stress-test your systems regularly 37 Marc Ronez -Emerging Risk Management - Copyright @ ARiMI 2014

Health Check for your OrganizaBon Emerging Risk Management (example)

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Q1 – How do you grade your organization’s emerging risks identification, measurement & monitoring practices? Are scenario analysis & stress testing performed?

Q2 – How confident are you that you would be able to detect, understand and mitigate an emerging risk better and before your competitors?

Q3 - How well is the topic of emerging risk communicated and understood throughout the organization?

Q4 - What level of importance do your executives – and your managers – place on emerging risk? Does it influence strategic & operational decision-making?

Q5 - Are there significant specific resources (human, financial, ..)devoted to emerging risk issues and their management?

Q6 - Do you believe that any of the next 10 years could resemble the past five years?

Q7 – Are Business Continuity and Disaster Recovery plans defined, tested and regularly updated?

Q8 - How is incident and crisis management handled in your organization? Any post mortem analysis performed?

Criteria for Emerging Risk Management Maturity

CR

ITER

IA

✓

✓


✓

✓

✓

✓

✓

✓

Time focus on Emerging Risk Management!

Marc Ronez -‐ Chief Risk Strategist & Knowledge Leader at ARiMI -‐ Asia Risk Management InsBtute

An ERM & Governance expert with 20 years of experience both as a practitioner, trainer & coach for large MNCs, Governments & Charities. Marc has an MBA from the University of Chicago GSB, an MSc in Insurance & a LLM from the University of La Sorbonne

What do I do? Help managers & leaders to use Risk Management to:

þ  Resolve difficult operational and business challenges þ  Take & manage risks effectively to build sustainable & profitable growth models


Marc’s specific areas of expertise include ERM, risk decision-making processes, corporate governance, Business Ethics, Social Responsibility, risk-aware culture, risk communication and crisis management, business model/Strategy Risk Management, corporate learning systems development.

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Risk Management is a con/nuous journey, not a des/na/on!


Marc Ronez is on Linked in & WordPress

You can find his profile & read his blogs at: P: sg.linkedin.com/pub/marc-ronez/1/3b6/465/ B: theriskmanagementparadox.com B: riskmanagementdemystified.com

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ARiMI – Asia Risk Management InsBtute


ARiMI is an applied research and business studies ins0tute that was set up in 2003 (in partnership with NUS ext) and has established itself as the Ins0tute of Reference for Enterprise Risk Management studies in Singapore and in the region.

We FOCUS on programs:

1.   For Decision-‐Makers (Middle to Top Management): Developing PRACTICAL Knowledge & Skills in Risk & Crisis Management

2.   For OrganizaBons: Building CAPABILITIES for Sustainable and Profitable Growth by EMBEDDING Risk Aware & Crisis Readiness Culture

ARiMI, Asia Risk Management InsBtute


ARiMI -‐ Focus and ExperBse

● Crisis management & Business Continuity

● Leadership risk decision-

making and Social Capital ● Reputational Risk &

stakeholders management ● Corporate governance &

business ethics ● Business Innovation &

Corporate Transformation

Research

● Professional Designation Programs

CERM (Certified Enterprise Risk Manager), CPRM (Certified Professional Risk Manager), ARM (Associate in Risk Management), FSRM (Fellow in Strategic Risk Management)

● Public Seminars and

Workshops ● Corporate Training &

learning Programs

Education

● Risks & Opportunities Assessment & Mapping

● Crisis & Business

Continuity Mgt ● Reputation Risk Mgt & CSR

● Business Ethics & Fraud

Risk Mgt ● Risk Appetite & Risk Aware

Culture Readiness ● Project risk management ● ERM Implementation Innovation & Change Mgt

Expertise


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For more information on ARiMI,

check our website at: www.arimi.org


Developing Effective Leaders & Decision-makers for complex & volatile times

Important Note: Please note that that this presentation and its contents, is the intellectual property of the Asia Risk Management Institute Pte Ltd. It has been prepared for this MayBank Guru Series 2014 session and it cannot be disclosed, used for any other purposes without the specific written consent of the Asia Risk Management Institute. Whilst any third party information contained in this document has been obtained from sources believed to be reliable, no representations are made as to its accuracy or completeness. Further, ARiMI expressly disclaims any responsibility for liability or loss arising from use of such information or from any of ARiMI's comments upon it.


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Maybank guru kl 2014 emerging risks in banking marc ronez presentation_ss