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.”

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 CarsMass
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?
12Marc Ronez -Emerging Risk Management - Copyright @ ARiMI 2014
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

16
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)

19
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
“..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

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

32
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

35
- +
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

Health
Check
for
your
OrganizaBon
Emerging
Risk

Management
(example)

38
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
CRITERIA
✓
✓
✓
✓
✓
✓
✓
✓
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.
39

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
40

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

44
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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