Emerging risks: An exploratory study of several case studies. ‘How do companies, in the banking sector, build a process to consider emerging risks.’

Details

Supervisors

Decaux, Loïc

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion, à finalité spécialisée

Abstract

We have seen that the financial crisis of 2008 as well as the recent events related to the covid crisis and climate change have had major effects on the banking sector. The regulator, as well as banks, have a perception but no precise knowledge of these so-called emerging risks, nor do they know how severe they will be or when they will materialise. This thesis aimed to provide banks with tools and recommendations for emerging risk management, according to the four key stages of risk management. In the risk identification phase, we have seen the importance of looking forward and taking risks into account from various assumptions and from the first early warning signals. During this phase, it is important that banks read reports published by certain institutions and organisations on key emerging risks and trends and discuss with their peers to ensure that all risks are considered. Secondly, regarding the risk assessment phase, we have seen that it is interesting, in the first instance, to adopt a silo approach, to identify the causes of the risk. Then, the risks are assessed with a holistic, collective, approach where they are integrated into the traditional risk taxonomy. This is followed by risk mapping and scenario quantification, where the risk management team supervises and carries out, by avoiding possible cognitive biases. Finally, this stage ends with the stress testing exercise. The third step concerns the implementation of action plans to mitigate the risks, which must be reviewed after the occurrence of each event. The control phase, on the other hand, is based on the implementation of qualitative risk indicators to ensure that these risks do not exceed the appetite set by the bank's Board of Directors. However, these steps differ according to the type and size of the bank. Whether is it in relation to the teams involved, the use of external consultants, the relationship between the Chief Risk Officer and its top management, the way in which risks are prioritised, etc. In addition, there is also the reporting that needs to take place throughout the process, both at top management and employee level. As well as the establishment of a good culture of transparency, people involvement and communication, including through non-financial awards. All these have been used for proposing a corpus of good practices.