en
Release date: 8 August 2024
A well-functioning risk management in banks does far more than just fulfill regulatory requirements. It also provides valuable insights and impetus for various business areas and can secure a bank’s profitability, capitalization and liquidity.
My name is Alessandro, and together with my colleagues I have been advising major international banks and providers of specialized financing on all aspects of risk management since 2023. In this article, I will take you behind the scenes and show you how we at zeb’s Risk team support our clients.
The vulnerability of the financial sector to risk has been evident at least since the global financial crisis of 2008. Even though measures such as stricter capital requirements for banks were introduced in the wake of the crisis, the system still isn’t immune to risk. The fact that recent difficulties, such as those at Credit Suisse or Silicon Valley Bank, did not develop into major crises underlines the relevance of effective risk management. Most risk management schemes are based on quantitative models, which can be used, among other things, for calculating the default probabilities of loans or for stress testing purposes. On top of running these models, banks need to interpret the analyses in order to make the right strategic decisions to strike a balance between risk and return. Every day anew, we support our clients with precisely these tasks: measuring risks via quantitative analyses and deriving strategic impulses from an integrated profit and risk management perspective.
Due to its complexity and diversity, the topic of risk management presents our clients with a wide variety of challenges. As a direct point of contact for CROs and their teams, we have aligned the focus of our range of consulting services and our expertise accordingly.
Some of our colleagues work on methods for quantifying different types of risks, namely: credit risk, which arises from lending business, market risk, which emerges from fluctuations in the financial markets or liquidity risk, which results from a lack of disbursable funds. An overarching risk governance scheme does way more than define risk management-related processes and responsibilities. It also serves the strategic classification of the facts and figures resulting from the analyses and their evaluation based on the previously defined risk appetite or limit system for a consistent risk management – this is another task that we support our clients with. On top of that, we develop flexible and pragmatic stress testing solutions that account for current economic trends and regulatory requirements in order to ensure our clients’ long-term risk-bearing capacity. Another part of our team deals with tools for managing existing risk positions. This includes the optimization of risk reporting, as well as topics pertaining to portfolio analytics and management, which may result in risk transfers (e.g. as securitizations). Risk-adjusted pricing and intelligent early-warning systems in a bank’s lending business are also analyzed to derive ways to further refine them. Our knowledge and our skills allow us to provide CROs not only with methodological, subject-matter advice, but also with a quantitatively sound basis for decisions on important management issues.
As “risk consultants”, our skill set comprises both analytical abilities and subject-matter expertise regarding the financial industry and current trends. We always keep abreast of the latest developments to continuously improve our solutions. To this end, we work in smaller sub-teams and leverage our internal and external networks. In on-site or remote workshops, these sub-teams present their results to the other members of the overall team, who are happy to offer their constructive criticism. In our dynamic working environment, seniority plays a very subordinate role, and valuable input is appreciated as such. We also use a wide variety of different technical approaches. In our projects, we focus on the clients’ needs and use a wide range of applications, including analysis and reporting tools such as Microsoft Power applications as well as R, Python, and machine learning tools.
As part of a highly regulated industry, banks’ risk management is also subject to regularly revised regulatory requirements from Brussels. The CRR III (Capital Requirements Regulation III) demonstrates that even regulations that aren’t in force yet can already have strategic implications today.
Just like any other area in banking, risk management is also shaped by current trends such as digitalization and sustainability. Especially the latter has recently developed from a mere marketing label into a major overarching issue in risk management. Our clients are facing important questions, which we help them find answers to from various perspectives: Which customer groups are affected, and how do I take the market-related risks into account? How can credit customers be supported in adapting to climate change in order to maintain their creditworthiness in the long term? Or how should credit guidelines and processes be adjusted to promote sustainable financing? We use creative approaches to provide client-specific solutions, e.g. for measuring risks based on portfolio-specific climate scenarios.
So you see: it never gets boring, and I think the diversity of risk management is one of the most exciting aspects of my work. We support our clients with their strategic decisions on the basis of quantitatively sound analyses – from the basic idea to its implementation – and develop a holistic understanding of banks and their business models from various perspectives. The necessary flexibility in my daily work in combination with a healthy error culture allows me to build on my individual strengths in zeb’s Risk team and to hone individual skills.
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