Risk Management in the Age of Disruption: SIBOS 2015
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Swift Lecture series SIBOS Singapore 2015 talk. How do we manage risk and make decisions in an era of accelerating change? Dynamic maps are critical to help us navigate a rapidly changing landscape. Network visualizations enable us to identify hidden risk patterns, and detect emerging risk before tipping points are crossed.
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Risk Management in the Age of Disruption: SIBOS 2015
- 1. RISK MANAGEMENT IN THE AGE OF DISRUPTION Singapore 14 October 2015 FNA Alan Laubsch Director alan@fna.fi
- 2. 2 Agenda 1. Adaptive Risk Management 2. Identifying Phase Transitions 3. Conclusions
- 3. 3 s 2015 Map of the Internet Connected
- 4. 4 Risk
- 5. 5 Implication of Complexity From “Predict & Control” to “Sense and Respond” with Dynamic Steering
- 6. 6 Seek to understand hidden fault lines… While Qantas & CX rerouted, many continued business as usual: “We've flown this route for many years, it's safe and that's the reason why we are taking this route” Source: BBC
- 7. 7 Market linkages Asset price data Clustering Balance sheet data Financial Cartography reveals connected risks and hidden patterns Bilateral exposure data Central nodes
- 8. 8 How to manage emerging systemic risk? As in healthcare, our best chance lies is early detection Source: MULTIPLE SCLEROSIS: ORIGIN OF ABNORMAL CELLS FOUND UC DAVIS (2011)
- 9. 9 AdaptiveRisk Management: Integrate Macro and Micro intelligence I. Macro: identify potential scenarios See: Adaptive Stress Testing: Amplifying Network Intelligence by Integrating Outlier Information (Laubsch 2014) II. Micro: monitor visible risk Tremors Fault Lines
- 10. 10 Diffusion of Disruptive Innovation Source: Wikipedia; see Geoffrey Moore’s “Crossing the Chasm” (1999)
- 11. 11 U.S. Subprime Bond Early Warning Case Study -105.0% -52.5% 0.0% 52.5% 105.0% 157.5% 7/19/06 9/5/06 10/23/06 12/8/06 1/29/07 3/16/07 5/2/07 6/19/07 8/6/07 9/21/07 11/8/07 12/28/07 2/15/08 4/4/08 5/21/08 SpreadChange Date 300%+ increase in vol from Dec 12 to 21 '06 99% VaR bands vs 2006-1 AAA spread changes HSBC subprime disclosure triggers a 12 sd move on Feb 23 '07, the day after the $10.5bn HSBC loss announcement Ratings agencies initiate reviews and/or downgrades week of July 9 '07 Source: Alan Laubsch “Subprime Risk Management Lessons”, RiskMetrics 2. GS exits subprime (Micro) 1. Robert Shiller warns of housing Bubble in 2005 (Macro)
- 12. 12 Three Stages of Risk: U.S. Subprime Crisis 0. 125. 250. 375. 500. 1/19/06 4/27/06 8/4/06 11/13/06 2/23/07 6/1/07 9/10/07 12/19/07 4/1/08 Dec ’06: first tremor (vol up 300% Dec 12- 21) Feb 23 ’07: HSBC subprime loss disclosed AAA Subprime Bond Spreads (2006- 1) AAA) First ratings agency downgrades week of July 9 '07 bp's 1. Hidden Risk Innovators 2. And the biggest surprise?1. When was the biggest risk? 2. Emerging Early Adopters 3. Crisis Early Majority
- 13. 13 Tipping Point Dynamics require early detection and action • Look for exponential rates of change Source: “Building A Reputation Risk Management Capability”, Diermeier & Loeb, 2011 Invisible/Potential Visible & amplifying
- 14. 14 Agenda 1. Adaptive Risk Management 2. Identifying Phase Transitions 3. Conclusions
- 15. 15 Dragon King (Sornette 2009) Black Swan (Taleb 2001, 2007) Two kinds of crises What are you afraid of? The future is already here. It’s just not very evenly distributed. - William Gibson
- 16. 16 Energy Disruption: No escape for fossil fuels
- 17. 17 Solar: Half way to 100%…
- 19. 19 Tesla vs Model T trajectory
- 21. 21 Accelerating Rates of Adoption
- 22. 22 Rise of the machines…
- 24. 24 Bank unbundling… and re-aggregating?
- 25. 25 How important is Bitcoin? “Like Internet in the 1990s…”
- 26. 26 Agenda 1. Adaptive Risk Management 2. Identifying Phase Transitions 3. Conclusions
- 27. 27 Manage polarities for virtuous cycles Outcomes reflect compounding feedback loops which create virtuous cycles or death spirals (“Rethinking capitalism,” Hanauer & Liu, 2012)
- 28. 28 Build a Risk Culture with Dynamic Shared Maps Energy Phase Transition
- 29. 29 Mass collaboration platforms empower social intelligence “…if you have an idea and I have an idea and we exchange them, then we both have two ideas. It's nonzero.“ -- Dean Kamen (“Abundance” by Diamandis & Kotler) facebook graph of social relationships
- 30. 30 Conclusions: Key Polarities • Fault lines & tremors • Think big & move fast • Core & Periphery All interesting things happen at the edges of the system. They do not happen at the solid core. In the edges where things are uncertain is where the evolution happens. - Vinod Khosla
Editor's Notes
- We live in an increasingly complex and fast moving world. Predict and control no longer works. A more sensible approach is Sense and Respond. A mountain biking race would be a good analogy. Of course we do all the homework and map out the course, get GPS and weather forecasts. But what makes the real difference is executing on the course, sensing and responding to the changing conditions of the course. This is a paradigm we will take to stress testing.
- At FNA we’re map makers. Maps amplify intelligence. They allow us to see hidden patterns in complex data. How are risks connected, and how do they evolve in a complex non-linear network?
- This is an image of a brain scan showing abnormal cells in that are early warning signals for MULTIPLE SCLEROSIS in a recent study from UC DAVIS. There are so many parallels between systemic risk management and healthcare. Because our ability to control goes down exponentially after tipping points are crossed, our best chance lies is early detection and action. And the good news is in both finance and healthcare we’ve started to build useful diagnostic tools that allow us to better detect unhealthy patterns early. Posted by Phyllis Brown-UC Davis on August 30, 2011
- Identify where we are in the business growth cycle (from macro to sector & firm level) Diffusion of ideas and innovation in societies follow exponential growth patterns also seen in epidemiology Monitor factors that change contagion rates and “tip” epidemics Malcolm Gladwell’s “Tipping Point”: Connectors, Mavens, Salespeople How is today’s financial fashion evolving? Monitor factors that change contagion rates and “tip” epidemics How is today’s financial fashion evolving?
- This is an interesting graph from a reputation risk consultancy. It shows the rapid phase transition of reputation risk, and how the only time to potentially exert control is before the exponential viral spread. However, most firms typically only respond at the inflection point, after a tipping point has been crossed and there is little chance to exert control.
- - Coal, Tar Sands, Shale, Deep Sea Exploration - Materials. Utilities? - Russia, Brazil, Mexico, Australia, Canada - Junk bonds - EM bonds - Financials with Energy Exposure