Navigating the future of Financial Resource Management through cross-risk analytics

Learn more about the six principles of cross-risk analytics to improve Financial Resource Management.

Serge Malka
March 15, 2024
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"Everyone has a plan until they get punched in the face." This insightful remark, shared by a panelist at the Center for Financial Professionals (CeFPro)'s Treasury & ALM USA event in NYC on March 6, 2024, is a testimony to the importance of robust risk management transitioning from calm to stressed times, when financial resources are scarce. 

Cross-risk analytics stands out as a crucial tool, increasing risk management robustness and sophistication, steering through the various risks and challenges faced by financial institutions. It ensures that organizations are not merely reactive but proactive in their strategies. Here we outline six fundamental principles of cross-risk analytics that are crucial for risk and finance professionals:

  1. Keep Up with New Models and Regulatory Demands:

Post-Great Financial Crisis, new frameworks have been developed, including sophisticated capital planning exercises in the US and the inclusion of liquidity projections. Notably, models addressing the solvency-liquidity nexus have been developed, highlighting the interplay between solvency and liquidity risks. Regulators are increasingly seeking alignment between these exercises, such as exploratory scenarios from the Federal Reserve Board or requirements from the Office of the Superintendent of Financial Institutions (OFSI) in Canada. Additionally, research specific but critical topics such as the convergence of online and traditional deposits is advancing.

  1. Integrate Human Experience with Cross-Risk Analytics Sophistication:

As technological capabilities enable advanced analytics, the need for human insight in decision-making grows, including the application of the "bad luck principle." Recognizing that any theoretical scenario can occur over time, even those seeming incompatible across risk types, underscores the need for an effective risk management framework.

  1. Prepare and Be Agile:

Cultivating agility among risk management teams and decision-makers is crucial in responding to major events. The frequent occurrence of crises, from specific incidents to global emergencies like COVID-19, necessitates quicker adaptation, moving from fixed scenarios to flexible playbooks. Agility and preparedness also enable seizing opportunities during crises, as evidenced in the aftermath of the Great Financial Crisis and recent events in the US and Europe.

  1. Continuously Improve Risk Capacity:

Incorporating stress tests on traded risks into an organization's risk capacity - a key concept that measures the volume of risk an organization is willing to take – is straightforward, but extending this to other risks, including cross-risks, is more challenging. A comprehensive view of all risks, including strategic and business risks, is essential to avoid blind spots.

  1. Constantly Improve Explainability:

The ability to clearly explain complex risk scenarios down to the transaction level is invaluable, enhancing decision-making and organizational buy-in. Transparency and understandability of risk strategies at all levels of the organization are crucial. However, as analytical and explanatory capabilities improve, maintaining a critical perspective on models and metrics is vital for effective risk management.

  1. Prepare Crisis-Time Operating Models:

Distinguishing between calm and crisis-time operating models highlights the importance of preparedness and role clarity during stable periods and the provision of decision-making tools in crisis. Gradually integrating cross-risk analytics prepares organizations for quick, informed decisions when most needed.

In summary, the principles of cross-risk analytics detailed above are not mere guidelines but fundamental strategies for navigating across calm and crisis periods. They mark a transition from isolated risk management to an integrated, holistic approach that leverages analytics, regulatory compliance, and human insight. They underscore a shift from siloed risk management to an integrated, comprehensive approach that leverages the full spectrum of analytics, regulatory compliance, and human insight. For risk and finance professionals, embracing these principles means not just surviving but thriving in an environment where change is the only constant.

1 Interest Rate Risk in the U.S. Banking Sector, Federal Reserve of Richmond, Abdymomunov, Gerlach, Sakurai, January 2023 ; Liquidity at Risk: Joint Stress Testing of Solvency and Liquidity, Rama Cont Artur Kotlicki Laura Valderrama

2 University of Chicago, Monetary policy transmission through online banks, Erel, Libersohn, Yannelis, Earnest. 2023 and Destabilizing Digital 'Bank Walks', Koont, Santos, Zingales 2023

About the author: Serge Malka joined Opensee as the Advisory Head for Capital Markets, driving US market solutions with over 25 years in capital markets and risk management consulting. With leadership roles at Big 4 firms and system integrators across the US and Europe, he specialises in significant regulation implementation including Basel II and III, and the Fundamental Review of the Trading Book (FRTB). He also led risk management projects for European credit institutions and contributed to the transformation of financial strategy and risk management frameworks for global banks.

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