OCTOBER 2019CIOAPPLICATIONSEUROPE.COM9result, some banks literally claimed that the reel event they faced was a six sigma. Which makes it as rare as the origin of the universe. The 6 sigma is however computed with the model and therefore implicitly the assumption is made that the risk model by itself is good. But that is not likely as well, these events do not happen in a 30 year period (the VaR models are in use since the early 90's). Indeed George E.P. Box statement also holds for risk models. So now we need excellent risk managers in the New bank, that are also able to reflect on themselves.The reaction of the governments on the crises was to extend regulation. Although the intention of regulations are by nature good since regulation is created to prevent a bad outcome happening again. But we should be aware that regulation creates risk as well. A simple example is again the VaR confidence level of 99.95 percent. This percentage is in the European law, which gives it regulatory support and therefore a certain trust. Furthermore, as a bank you are forced to use this percentage and the model (if you like it or not). Consequently the VaR figure will become the number you steer your percentage in a myopic way and unavoidable at some point the bank will be discover that events that were not predicted by the model will happen again. The fact that the law holds for everyone (i.e. all banks use similar models and the same likelihood), means that the rare event is not foreseen by all of us giving us a receipt for the perfect storm. Again the bank needs good risk management to differentiate from the herd.The whole digitation of banks is adding complexity and risk to the industry. Basically banks are more and lead based on outcomes of complex algorithms. E.g., artificial intelligent and cryptography, can only be understood by educated mathematicians. Typically these backgrounds are not present at board level. Here the CRO has an important role, not only by providing a quantitative background, but also by challenging if the additional complexity is really needed, and if so identifying and managing the new risk that do arise. All together risk management has never been more needed within the bank. It is already out of the back-office controlling role and is now growing in a full executive level function that is involved in any decision made. The risk role will be challenging however, since new risk will arise and events will happen that we are currently not aware of. Even more challenges are ahead of us, because in the digital world we have to act fast on events. Events travel much faster than before due to more connectivity than ever. In any case Risk is definitely an exciting place to work in. The whole digitation of banks is adding complexity and risk to the industry
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