ISO 31000 for banks

ISO 31000 is a risk management standard that provides generic guidelines for the design and operation of an enterprise risk management framework. Released in 2009 by the ISO standards board, the standard itself has been crafted in such a manner that it makes ISO applicable for any organisation type. Theoretically banks to manufacturing firms can benefit from implementing ISO 31000.

What we are exploring in brief today is: Should the banking sector entertain ISO 31000 when it already has an established global risk standard of its own?

The presentation for this posting can be found by following this [link]

Monte Carlo and Loss Data

Recently I had a discussion on modelling risk with a fantastic and successful business person who said to me : "I have read about Monte Carlo, you even make mention to it on your blog but it doesn't make great sense to me. The maths in Monte Carlo is even worse because it seems to confuse the concept by taking it into an academic place that most people aren't from.

Is it possible to explain Monte Carlo by using a tool we all understand such as Microsoft Excel?"

So be it, this blog posting is an Excel example of Monte Carlo and Loss Data. Due to the size of the post, it will be separated into two, possibly three updates.

Breaking down the silo

I often hear from risk analysts that we need to break down the risk silo and stop measuring risk in unique disciplines but such a statement without thinking begs the question: If the silo is so evil, why did we invent the structure in the first place?

In this quick posting we look at risk silos, why they exist, the problems with them and how to make them work.

Bureaucracy Banking

Banking today is viewed upon by the customers it is designed to serve as sick. 

The causal factors for the Global Financial Crisis have been debated by many a soul and some blame our economic pain on feeble regulation, others on poor credit risk origination practices or asset bubble growth in a long only market. There is actually a whole array of factors that break banking greater than these three reasons alone I can assure you, but emphasis aside, nearly everyone I speak with will put the banking sector squarely and central to the debate of our economic woes.

What has gone wrong with banking then?

Correlate your risk factors

When modelling enterprise risk outcomes, analysts need to consider the correlation between variables in their algorithms. If they don't, the potential loss estimates they generate from these calculations are likely to be extremely erroneous.

A recent linked-in discussion on the dependency, correlation, causality and mutuality of multiple risk factors has opened up an interesting debate on the subject and stimulated this blog post. Additionally, after speaking with several risk analysts on the subject of factor dependency, there also appears to be a genuine interest in putting to word how to model an aggregate level of risk which is sensitive to correlation.

In this article we review a very straight forward method for measuring correlation in risk variables and for propagating a final outcome.  We also show why the process under CAPM is flawed.

What is wrong with VaR

Value at Risk (VaR) is often criticised. This is especially the case from those who don't use it, no surprise there and I label such propaganda as statistical xenophobia by the masses. There is even a mainstream following that claims in some respect that the use of Value at Risk should be scrapped. Interestingly, I have never met anyone of this thinking who is able to suggest a viable and cognitive alternative. Well, not quite yet that is.

In this post we look at the problems with VaR and what can be done to improve this measure of potential downside.

Problems with Probability

Why we don't know what we talk about when we talk about probability has been revisited by its original author Nassim Taleb in a recent publication on his Fooled by Randomness portal. Great claims are being made in this paper that perhaps we should ban the use of probability and sometimes the best discoveries seem to occur when we explore dynamics at their extremities. This might just be the case here as well.

In this short post, we take a look at the recent paper "Problems with Probability" published by Nassim Taleb.

Frequency x Magnitude - the wrong measure

In the world of operational risk, there are a lot of analysts who believe that they can dimension the impacts from uncertainty by counting the number of events they experience over a period of time and then multiply that count by the average loss amount for the total event horizon. This approach for quantifying the impacts from uncertainty is full of error and it should be avoided.  In fact, let's be clear, it is so fundamentally wrong as a measure of exposure that it isn't even a good estimate of how much operational risk may cost us in the future.

In this article we will look at why F x M = Exposure, doesn't equal the true potential loss for operational risk and what can be done to improve this measure of risk.

ISO 31000 and Objectives

ISO 31000 is becoming a popular risk framework, a credible alternative for COSO and many organisations across the planet are now selecting this approach for formalizing their internal risk programs directly. Actually, ISO 31000 is probably taking the lion's share of market interest for risk management at present and that isn't such a bad thing.

One aspect that sets ISO aside from many other risk frameworks in use, is its clear delineation yet connection between an objective and the objectives uncertainty. In this article we take a brief look at this relationship.

Funding Liquidity Risk

Basel III includes a new standard for Liquidity Risk that seems to be tripping up a few risk analysts working in this domain. In this post we briefly look at the possible outcomes from a poorly managed liquidity risk program and also the types of initiatives banks may consider for meeting the new Basel III Liquidity Risk Standard.

Crowded Markets

The equities market a decade ago cannot be compared to what it has become today.

Over the last ten years globalization really has become that and connectivity has reached the masses.

The rise of Exchange Traded Funds, High Frequency Trading, the increase in the number of large positional hedge funds and the interest for sovereign powers to replace state funded pension programs with community based superannuation disbursements, are all driving factors for the emergence of asset bubbles.

In this short post we look at why asset bubbles are going to become a common occurrence.

Heat Map Distortion

For most risk systems one big selling point is the heat map. It's tidy, it's colorful and in a macabre kind of way, it really energizes management to stare in ore at risks registered in the red zone. For the consultant it is a dream come true and the more they find wrong with a business, the more valuable they seem to become.

Worthy or not, traditional heat maps distort risk reality, they squeeze risk into a two dimensional perspective that makes the reporting process itself as dangerous as it is useful.

1+1 doesn't equal 2

In the world of risk, statistics, finance and many other fields of endeavour, 1+1 does not equal 2.

It's a little bit complicated but as 1+1 does not equal 2 in the realm of risk and while executives believe that 2 is the answer, our banking system will inevitably continue to fail us.
  

Changing the way we educate bankers

In the next five years the world of traditional banking is going to need to adapt in more ways than we can possibly imagine if it is to survive. These changes are likely to be driven from external factors, that is obvious. Recently however, internal catalysts seem to be appearing in the market that may question the very way these institutions function.

In this post we look at how some banks are starting to rethink their training environments to meet tomorrows banking challenges.

Is enterprise risk a journey or a destination?

A couple of days ago a customer asked me; is Enterprise Risk Management the end game in the world of risk? 

After reading a recent question on an ERM Linked-in forum, which goes something like this: "Is enterprise risk a journey or a destination?" I have been encouraged to write briefly on this subject here.

  

So then, is Enterprise Risk Management a journey or a destination?

China's Reserve Ratio Tactic

As last year drew to a close, the Peoples Bank of China cut the reserve requirement for local banks in an effort to swiftly ease funding liquidity conditions in the country.

In this post, we look at this tactic and why the central bank is doing this.

Risk Balanced Selection of Manufacturing Projects

Question: I have a situation in manufacturing operations where we have to take a judgmental decision on our equipment’s re-furbishing based on visual inspection. It is a very crucial area of the business since it is part of the complex and risky Klinkerization process.

In the short of it, we have to decide whether to replace brick lining which is critical for the survival of the equipment before the next shutdown and that is a year later.

There are several ways I would go about dimensioning risk on this type of potential project and these have been introduced in the presentation that is attached to this post.

How to use external data in operational risk

Under the Basel II operational risk Advanced Measurement Approach for quantifying operational risk losses, banks need to factor external loss data into their internal capital models. The argument is old and has been debated for years but that hasn't prevented the topic of external data resurfacing again and again with risk managers in financial institutions.

In this journal, we look at key practices for implementing external loss data in a banks OpVaR calculations.

Building an Operational Risk System

There are stacks of operational risk reporting systems on the market but in general many of these risk solutions are overpriced and unsophisticated programs. 

So then, why not build your own operational risk reporting system?

In this post we look at building a risk modelling system from the ground up and believe me, it isn't as hard as you may think.

Unified Policy Frameworks

Causal Capital has recently been asked to develop a framework for unifying policy in a bank. We have decided to share our draft approach on this journal because some of our readers are working in this area of banking and might find the presentation interesting and useful.

Please Proceed into this article for the presentation.