Which are some stylized failures of Risk Management?
It is the only subject when turned into a profession, which fails to deliver in SVA terms in most of the cases, as witnessed now outside the Insurance Sector
Insurance is a different game because the profession is led by well-trained quantitative professionals such as Actuaries
Why it has not worked well outside the Insurance Sector/s?
The multiple reasons for the failure of Risk Management and Auditing Departments at firms could be the following =>
1.The maturity level of each organization is different and not naturally adapted to act, by giving a timely response to risk flags and control violations, as required.
#CGMA #IRM #ISO31000 #COSO #ERM #FRM #QRM #FBRA #FEMA #HACCOP #Hazard #Incident #Risk #Basel #SCR
2.Auditing & Risk Management continues to be dominated by Accountants, who are poor at understanding numerate disciplines such as mathematics and statistics/ econometrics, & so on etc.
Hence, a Risk Gap, to them is strictly a process gap, which can be filled by inserting controls
Accounting drove #Auditing lingua franca which uses financial auditing lexicons, terminologies and taxonomies to understand firm-wide risks confining all risks within one branch of specialism across the boardroom.
Not going beyond Materiality Misstatement Risks!
Some examples of ignorance of certain underserved areas are IT /MIS /Cyber, Financial Crime, AML/KYC, Economic Predicate #Crimes, Quantitative Model Governance and Fraud Risks, and design of appropriate controls and monitoring of the same by both the Audit and the Risk Department
3.Developing Risk Departments without undertaking GAP Studies.
4.Not updating risk registers.
5.Not understanding the difference among risk registers, RCSA Forms and templates, and Risk GAP Studies,
6.Using #KRIs to develop #RCSAs(when it should be the other way around) and update the timeline on given risk exposure, with the wrong information.

7.Delay in processing and flagging key operational and financial risks control violations
8.Lack of actionable #BI and Retrievable Information to further solidify the risk registers and the risk reporting frameworks in place.
9.Reactive risk management is auditing.
Risk Management should not be reactive but pro-active.
But how?
This requires extensive discussion.
10.Lack of Risk Culture.

Easy to hire a CRO and risk professionals.

Will other members of the organization equally well know and comprehend their standards, processes, policy nuances, conceptions, sophisticated terminologies, jargon, symbols, and heuristics, and signals, etc?
11.Confusion across the three lines of defence.

The 3 -LOD Model is neither well understood nor well entrenched to prevent risks from cascading across an organization.
12.Firms willing to implement some form of risk taxonomy and methodology using a CBOK(Common Body of Knowledge), do not have adequate human capital or well-trained or utilized BI - Business Intelligence Automated Systems to effectively implement escalation procedures in real-time
13.Risk Theory never equal to what we observe and deal with in reality.

What we learn in risk management or quantitative finance or financial engineering degree program does not apply in the real-world scenarios.
A common fallacy of assumption is the reliance on using the #Gaussian distribution to model operational and financial risks.
14.Poorly coordinated #GRC Activities.

15.Lack of Oversight from the #BODs.

16.Lack of qualified director-level appointment within the Boardrooms.

17.Risk of #Silo culture!
Working in Silos across an organization and no integration of risk strategies as per policies.
QRM Quantitative Risk Management has deeply disappointed, both the shareholders and the regulators, especially in the Non-Insurance Field, such as banking and asset management.
To overwrite this history of failures of Internal Auditing, Risk Management, Internal Controls and now the last in line to follow is ERM /IRM, in the corporate world, both as a process and methodology, we need to make risk management more practical, testable, and verifiable.
But, unfortunately, the academic mafia and the regulators, including overzealous practitioners have seemingly not learned their methodological lessons post-GFC.
Its a sign of insanity that we do the same experiments and expect different results.
For that, we need another thread.

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More from @SAH16928046

10 May
What is the Gaussian copula and how to use it to derive the joint probability of the default of two assets?
This is an interesting question, but I would like to discuss its implications and how this kind of model added fuel to the global financial crisis fire back in 2007.
Risk Management is like a Greek Tragedy, where actors laugh to express their sorrow. Hence, here what mimics laughter is the Normal (Gaussian) PDF and its assumptions.
Read 15 tweets
8 May
According to Hendry and Richard (1982), a final acceptable model should
satisfy several criteria (adapted slightly here). The model should:
● be logically plausible
● be consistent with underlying financial theory, including satisfying any
relevant parameter restrictions
●have regressors that are uncorrelated with the error term
● have parameter estimates that are stable over the entire sample
have residuals that are white noise (i.e. completely random and exhibiting no patterns)
● be capable of explaining the results of all competing models and more.
Read 4 tweets
8 May
When we talk of IR #Interest #Rate #Risks we must understand the markets in which this product operates, and the fundamental pricing, trading, and hedging dynamics of this financial #derivative asset class.
Banks normally use IR Derivatives and Structured Products for on and/or off-balance-sheet ALM Asset Liability Management and Immunization, Bond Risk Hedging, NII Risk Hedging, Arbitrage Opportunity Exploration using the treasury based fixed income desks, Rate Speculation, etc.
Of course, we have other financial market participants such as Pension Funds, Hedge Funds, Insurance Companies, and several other specialized asset management firms, that have strategies and asset allocation models, which use IR derivative for both Macro and Micro-hedging.
Read 26 tweets
19 Apr
What factors are considered by banks when assessing credit risk to customers?
Credit Risk Management is part of IRA - Integrated Risk Assessment that is carried out by banks to measure transaction and obligor default risks.
The credit risk assessment goes through stages =>
Front Office (RMs at the branches and/or Head Office prepare the credit application/ Clp for further processing).
Middle Office (Financial Risk Management Analysis for checking the Basel Pillar 1/2 Compliance Requirements, to check the BRMC - Board Risk Management Approved and Assigned Risk Appetite Limits etc.)
Read 22 tweets
19 Apr
What is better for working in the banking and financial services industry, a Master’s in #Economics or #Finance?
@CFAinstitute @LSEEcon @LBS
A very broad question!

How would you define Finance Roles across FI and Non -Fi Settings?
Finance work is required both within and outside the financial services industry. I can share my collective understanding of roles(that might require Economics or Finance related skillsets) based on my experiences, that I have collected on my CV.
Read 14 tweets
10 Apr
Does #risk management involve a lot of maths?
Yes and No!

It's a well-rounded discipline.
For #Actuarial, Insurance, Financial Engineering, Quantitative Finance and Investment Management, Mathematical Trading, and Financial Risk Assignments, you might require a lot of Maths and Statistics.

Is like asking whether we need milk and sugar for making ice cream ;)
Read 9 tweets

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