H7N9 - The world is not ready for this

If Dr Timothy Uyeki and Dr Nancy Cox from the Center for Disease Control have it right, the human species is sitting on the edge of biological catastrophe.

The subject of epidemic surveillance has featured before on this blog [LINK] but this time our posting is far less academic and a lot more preemptive in its warning. From early analysis, H7N9 is a major risk threat which needs wider attention. Let's take a brief look at what appears to be very concerning, even though it is only a matter days since H7N9 has entered our world.
  

Risk Dashboards

A recent debate between risk analysts on how to report risk resulted in several suggestions but the discussion was reduced to comparing one chart type with another. This is all fine and I threw in a recommendation for the 3 in 1 polar plot [LINK] but risk reporting surely has to be greater than this.

Reporting risk really needs to be more holistic and it should take in a wider perspective of alternate measures of uncertainty found in a firm. Risk Dashboards achieve this end and we'll take a look at a couple of them in this blog.    

Stress Testing Framework

Properly stress testing measures of risk is a complicated activity that few companies have done well.  In this blog we take a look at a complete framework for stress testing.

3 in 1 risk chart

A question from a client today kind of goes like this: "Is it possible to plot three types of risk variables in one chart and if so, what kind of risk chart could we use to achieve this goal?"

This is an interesting query for sure and risk charting is an area of risk management which is fascinating but can be quite complex. There is certainly more than one answer to such a question but today we'll take a look at Polar Charts as a solution.
  

Risk Taxonomies

A recent poll on whether enterprise risk frameworks should employ a risk taxonomy or not seems to have turned out an encouraging result. Over 93% of risk practitioners voting gave a thumbs up for risk categorisation and only a handful of souls repelled the concept.

In this posting we look at four steps to bring a risk taxonomy into operation and a Dendrogram Cluster Report is demonstrated to show how risk can be prioritized within a taxonomy.

Two schools of thought for measuring op risk

I have been reading a lot of posts on many different risk forums of late and it appears that the Frequency x Magnitude argument for measuring operational risk, is a stubborn pandemic and a failing that is going to be nearly impossible to move on from.

How do we really measure operational risk?

What is scenario analysis to op risk people?

Over the last few days, several people have discussed various scenario analysis techniques with me and going on general opinion, this risk assessment technique is very popular among operational risk analysts. Definitely no doubt there, but what scenario analysis means to one analyst, can often be something entirely different to another.

What does scenario analysis really mean to operational risk analysts?

Op Risk - 10 areas of success and 10 failures

Basel III slipping its deadlines isn't probably ground breaking news for anyone working in the Basel risk domain, it is even possible that Basel III may fail entirely but that is for another debate.

Today we are going to look at what worked-out in Basel II operational risk because this isn't a done deal either.

Global Risks 2013

The time of year has come around again for the World Economic Forum and its various research publications on Risk Management. This year the whole program is dedicated to the theme of resilience.

In this short blog posting, we'll take a look at the WEF report on Global Risks 2013 and which country comes out best as a leader in risk management.

Before reading on, can you guess who is going to be at the top of the league table?
  

ISO 31000 supporting Basel II

On the G31000 LinkedIn risk forum, we have decided to open up a new "chat room" that is dedicated to the application of the ISO 31000 enterprise risk management standard in Banking, Insurance, Supply Chain Finance, Markets and Investment.

The link for the new group can be found by clicking on the logo here 

In this blog posting we are going to consider whether ISO 31000 is compatible with Basel II from the outset.

Five thorns of ISO 31000

Anyone following the G31000 forum closely will come to realize that there are some continual inconsistencies of opinion which raise their head when ISO 31000 is discussed broadly. I call these debates of contention, the Five Thorns of ISO 31000.

In this blog posting, we are going to look at these Five Thorns in more detail. The aim in the end, is to put a structural emphasis on attempting to resolve them.

Performance and VaR Together

A lot of market risk analysts often question how they can compare risk with return or the relevance of tracking error in the context of Value at Risk and performance reporting together.

In this short blog posting, I link to a presentation which explains how performance reporting, risk measurement and tracking error may be delivered side-by-side.

Addressing Procyclicality

Basel III is actually proving to be quite an ordeal for both the banking community as well as the regulators and some senior members of the regulatory community, both in the UK and the US have made public statements to this fact.

Perhaps one of the biggest issues facing banks with Basel III is how to address Procyclicality, especially if the bank is not running an Advanced IRB credit risk framework. Actually, just obtaining information about the different accepted practices on how to measure Procyclicality within a lending portfolio isn't so easy.

Just the other day I was pointed in the direction of a really good summary and publication on Procyclicality and I wanted to share this link here on the Causal Capital blog.

Can risk practices be shared?

There is a common belief among many enterprise risk managers that practices in operational risk can be applied to market or credit risk with ease. However, such thinking might be a little bit misplaced.

Let's take a look at this.
  

Monte Carlo Example

A recent discussion on the G31000 forum debates the importance of Monte Carlo but it resulted in me promising a model to the group, a straight forward and fundamental model on Monte Carlo?

I have talked about Monte Carlo before on this blog and in more than one place. However, the effort today is to develop a Monte Carlo simulation in Excel that works for operational risk losses, rather than in market risk or credit risk where the technique is so often found. The objective is to build a fully working Microsoft Excel model which isn't just statistical theory but actually exemplifies the Monte Carlo simulation process in practice.

This article explains such a model and there is a link at the end of this posting that will allow you to download the spreadsheet, if you so desire.
  

Resolving Risk Disputes

The question today is; does the use of a risk framework such as the one proposed in the ISO 31000 risk standard reduce disputes between managers in a company?

A possible upside we may be seeking from a risk framework is the improvement in the sharing of risk knowledge, as well as the communication of business intel across a company. The ability for a risk framework to assign accountability to threats would surely be even more ideal.

One would hope that if managers can formally describe the types of risks they face in their daily work and communicate this insight to internal customers, staff would become more understanding and empathetic to problems or disruptions when they occur. Oversight and disclosure is often fantastic grease for the emotional machine of sympathy.

It could of course go the other way, the risk framework may drive arguments from differing opinions on risk treatment, bickering over risk budgets and divides on ownership and accountability of threats.

In the last twenty-four hours, what did the G31000 forum vote for in our poll?
  

Importance of risk categories

So much inspiration for articles in this blog seems to originate from reading what risk practitioners are writing about on the G31000 linked-In portal. One recent debate restarted an old angst on enterprise risk categories.

Personally I am a big believer in the categorisation of risk events and while this may not be popular among many of the non-banking members of the risk community, even more so with ISO 31000 practitioners it seems, I still believe it is an important exercise to carryout. Either way, I have taken to list ten reasons why causal event categorisation is crucial for the operation of a sound enterprise risk management framework.

Inherent vs Residual Exposure

A recent debate on the G31000 Linked-In forum around the gap between Inherent versus Residual exposure has shown that there is a large deviation on opinion, not only with what these terms actually stand for but why it is important to measure inherent risk as a value in the first place.

Inherent Risk is actually not a new concept to risk management and is captured in many other risk standards such as COSO but for ISO 31000, the term has uniquely been excluded. This omission adds to the confusion on whether it should be used at all, let alone why someone would want to understand their Inherent and Residual risk side-by-side.

In this short blog, we are going to investigate these two terms and how they interrelate with each other, why and importantly how inherent risk can be estimated. 

The Risk Clock

Some things come in cycles is a common saying I am sure we have all heard before. This seems to be even more so the case when we are presented with a complex disorder which is stubborn to stamp out. We will have moments when everything looks fine, only to be presented with a set of known preconditions over and over again that result in what we thought was under control suddenly being less so.

Are risks more seasonal than we would like to first imagine?

The Dark Side of Risk Management

Risk management can be a paradox in nature and this often leads entire communities, perhaps society at large to entertain red herring solutions for systemic threats. 

Today I can see at least three man made ills which may be killing us broadly and as a global community they are. Long term side effects may take us to a place that is far worse than where we are at present. Perhaps we should carefully rethink what we are trying to achieve because we may just find our desperate first attempt to resolve the unwanted is often not the most ideal solution.

Shutting down Libor, disbanding nuclear power and embracing a never ending program of Quantitative Easing could have dangerous outcomes which are not really understood in the long term. Let's take a look at Quantitative Easing and Libor, we can talk about nuclear power another time.