INTELLIGENT RISK knowledge for the PRMIA community
October 2017 ©2017 - All Rights Reserved Professional Risk Managers’ International Association
PROFESSIONAL RISK MANAGERS` INTERNATIONAL ASSOCIATION CONTENT EDITORS
INSIDE THIS ISSUE
Steve Lindo
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A letter from leadership
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Editor introduction
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Economics & geopolitical risks by Abdulkareem Sukkari
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World without a leader by Ajay Prakash
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Geopolitical risk in today’s world - a new elephant in the room - by Sharon Hufnagel
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Careers in risk: PRMIA panel offers expert advice
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Managing organizational geopolitical risk in a globalized world - by Vivek Seth
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Geopolitical risk framework - by Roopak Hooda
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A credit analysis of Brexit - by Eduardo S. F. Alves
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PRMIA Chapter Profile - Lahore-Islamabad chapter by Fahad Zafar
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CRO. superhero. the rise of the generalist - by Brian O’Donoghue
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What does banking disrupted mean to you? by Andy Condurache & John Anderson
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Preliminary results of the 2017 PRMIA Job Analysis Survey
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Calendar of events
Principal, SRL Advisory Services and Lecturer at Columbia University
Dr. David Veen Director, School of Business Hallmark University
Nagaraja Kumar Deevi Managing Partner | Senior Advisor DEEVI | Advisory Services | Research Studies Finance | Risk | Regulations | Analytics
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Intelligent Risk - October 2017
letter from PRMIA leadership
Justin M. McCarthy Chair, PRMIA
Kraig Conrad CEO, PRMIA
welcome to the fall edition of Intelligent Risk Your mission-focused, member-led organization has experienced tremendous growth this past quarter through initiatives that include new Learning and Development relationships in China, Middle East and Africa; more tools for our Community through the new website; and a partnership that will keep risk managers at the center of the disruption conversation. Through our new relationship with the Silicon Valley Innovation Center, we add risk management’s perspective to active dialogue on technology, talent development and the evolving role of banks in their customers’ journeys. The fundamental transformation of the business model is increasing in pace, and this collaboration will keep our organization and the profession sharp amid change. PRMIA also was at the table for conduct and practice conversations as part of the Banking Standards Board’s Professionalism Forum, a series of events to discuss and identify how to strengthen and facilitate professionalism in banking.
learning & development in our global network We invite you to join your peers and PRMIA Board members at an upcoming event to engage in our unique approach to advancing the profession and share thoughts with Board members on growth in service of our mission. The PRMIA EMEA Risk Leader Summit, November 13-14 in London, picks up conversations from the last Summit to bring together top-of-house risk practitioners and shape tomorrow’s risk teams. The Planning Committee welcomes risk leader practitioners to connect and engage in ways different than other risk events.
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The Canadian Risk Forum in Montreal kicks off November 13 with a pre-conference workshop, then on to a 2-day rich program November 14-15. The Planning Committee consists of representatives from Canada and they hope you join your peers for the 5th year of this powerful program. On November 8, the Washington DC and New York Chapters host “Redefining Financial Services Regulation,� a forum with skilled and outspoken industry, government and academia representatives. And, be sure to check the schedule for events at our 45 Chapters around the world. Visit www.prmia.org to learn more and join practitioners in your local community.
risk management challenge We ask that you help support our mission through support of the PRMIA Risk Management Challenge, a case competition that encourages students from multiple disciplines to use critical and creative thinking skills to solve realistic business problems with a risk management focus.
Help develop the next risk leader, spread the word on the Risk Management Challenge
engage your practitioner community As we do with each edition of Intelligent Risk, we invite you to be join us on our journey to serve the global risk profession. You are why the organization exists. Please raise your hand to volunteer, if you are not already serving, to add your voice to dialogue on the future of PRMIA.
Justin McCarthy Chair, PRMIA
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Kraig Conrad Chief Executive Officer, PRMIA
editor introduction
Steve Lindo Editor, PRMIA
Dr. David Veen
Nagaraja Kumar Deevi
Editor, PRMIA
Editor, PRMIA
The seven articles in this issue of Intelligent Risk address geopolitical risk from diverse points of view. Regional perspectives are represented by articles describing the impact of Brexit on corporate credit risk, the top geopolitical risks in the Middle East-North Africa region, and the significance of China-Pakistan collaboration in the CPEC. Geopolitical risk management practices are addressed in articles which describe a five-step framework for effective geopolitical risk management and a suite of five strategic measures for organizations to manage their geopolitical risk. The remaining two articles highlight new phenomena which are changing the nature of geopolitical risk, firstly leadership instability which is increasing geopolitical risk in developed countries, and secondly the emerging influence of technology and social media, with global and unpredictable repercussions. We hope you enjoy reading these thoughtful and articulate pieces contributed by PRMIA members as much as we did editing them. Besides assisting PRMIA in preparing these articles for publication, we’d also like to offer a short commentary of our own, on the subject of China’s influence as an evolving geopolitical risk.
China’s influence as an Evolving Geopolitical Risk Opportunity, Communication, Adoptability, Growth, and Power are synonyms for the evolution of the human race. Above all, the single most important trait is ‘survival instinct’, even though it’s a natural phenomenon for every living species, mankind has mastered the art of adaptability and is reaching great heights through innovation. During the 20th century, three major Geopolitical events shaped the world, including World War I, II & the Cuban Missile Crisis. A majority of the world’s population was greatly impacted. During the two wars, millions of human lives were lost, while a full-scale nuclear war almost broke out during the Soviet ballistic missile deployment in Cuba. The dissolution of the Soviet Union resulted in the end of the Cold War between the US and the Soviet Union and the creation of 15 new and independent countries. In addition, there were ongoing multiple regional and geographic wars affecting various regions of the world, notably the Korean War, the Gulf War and others. Intelligent Risk - October 2017
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Early in the 21st century, globalization swept across the world, with the easing of immigration restrictions in the US and EU. Trade between countries like India and China have led to new alliances and partnerships, while old economies are slowly diminishing in growth and dominance. New and emerging economies are dominating world trade, which has shifted the balance of power. More than ever, the world is on the edge of major geopolitical events that can pose an unprecedented threat to human civilization. Such geopolitical events could be a single situation or one that can trigger a magnitude of events.
China and its emerging influence on the world stage Asia has witnessed interesting developments during the Industrial Revolution and after the end of World War II, which resulted in Indian independence in 1947 and the establishment of the People‘s Republic of China in 1949.
Indian and China border dispute There are more similarities between the world’s two most populous counties and economies than differences in various terms: • Population growth - In the last 7 decades, the combined population between the two countries is more than 2.7 billion people (1.324 B and 1.379 B respectively), out of the 7.5 billion world population according to 2017 census data. • Economic growth - According to The World Economic Outlook update, the Indian economy will likely grow at 7 percent in 2016 -17, followed by further acceleration to 7.6 per cent in 2017 -18 and 7.8 per cent in 2018 -19, to become the 4th largest economy in the world, surpassing Japan and Germany, whereas China’s growth is expected to remain at 6.7 percent in 2017, the same level as in 2016, and to decline modestly in 2018 to 6.4 percent. • The Sino-Indian Border Conflict first occurred in 1962 because of an ongoing territory dispute along the 3,225-kilometre-long Himalayan border territory between the two emerging super powers. In recent months, growing tensions in the northeastern region of India between Indian states and China have reached a point where they are threating global peace and could potentially destabilize the global economy, with China threatening India with all-out war. • Interestingly enough, the history of the collision occurred during the Cuban missile crisis in 1962, when China’s occupation of India’s territory happened while the world was unaware of the developments between the two countries.
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China’s influence on resolving North Korean stand off • The US, with the help of the United Nations Security Council, unanimously approved new sanctions on North Korea, following its recent test of two intercontinental ballistic missiles. The North Korean regime is threatening to launch ballistic missiles at the US and EU. • China is one of the few countries on the world stage that has diplomatic relations with Pyongyang, which may help bring North Korea to the bargaining table to diffuse the tensions between the US and North Korea. This does not rule out the possibility of a “preventative war” over the latter’s nuclear push. China’s escalating tensions with Japan over disputed islands • A group of uninhabited islands controlled by Japan in the East China Sea is the center of escalating tensions. Japan received the islands following the transfer of administrative control of the islands from the US to Japan during 1968 -71 and Japan’s sovereignty over the territory is being disputed, which is causing diplomatic unrest in the region. China’s influence on Pakistan • China is heavily investing in infrastructure projects in Pakistan, while US administration efforts to reduce economic assistance to Pakistan are occurring. This is an opportunity for China to grow its influence that will impact the regional balance of power with India and other Asian partners. China’s influence on Latin America • According to the Brookings Institute, China’s rise in Latin America has been occurring over the past 15 years. China has become the most significant new economic power in Latin America and the Caribbean. China-Latin America trade increased from almost negligible in 1990, to $10 billion in 2000, to $270 billion in 2012, although the largest portion of this exchange takes place between South America and China. This raises important and legitimate questions about what kind of influence China has in the region, along with future risks in the region’s economic and political development. The ongoing political unrest within the European Union after Brexit, new Russia sanctions after its alleged interference in the US elections, and growing tensions between the US and its NATO allies give rise to an opportunity for China to be an alternative leader on the world stage.
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economics & geopolitical risks Today’s world is complex, hostile, unpredictable and interdependent!
by Abdulkareem Sukkari, PRM introduction Economic and political risks are more interconnected than ever before. The strategic success of any organization now relies increasingly on its ability to anticipate and react to future shocks. For every company considering market opportunities in the Middle East and North Africa (MENA), the region’s political and economic stability is of great concern. Economic problems can affect the timing of anticipated payments for products or services already rendered. Since international investments are essential to a country’s economic development, multinational companies do have leverage to pressure payments on a timely basis. This will not always be effective.
MENA region closer look The region now faces an increasing threat of violence and unrest from civil wars in Libya, Yemen, Iraq and Syria, and continuing clashes between Israelis and Palestinians. Add to this the rise of terrorist groups like ISIS, an erupting migration crisis as millions of refugees have been displaced and declining oil prices that have resulted in tighter fiscal policies, and political tensions are high throughout the region. In addition, many MENA nations face pervasive problems with corruption, payment obligations, currency risks and physical security threats. Companies must deal with bureaucratic minefields and an uncertain, ever-changing regulatory and tax climate. As a result, although not every MENA country presents the same challenges, companies looking to enter the region must conduct a careful risk analysis before expanding into this market.
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risks vs. rewards The rewards of doing business in MENA cannot be ignored. Organizations that pursue and adhere to strict principles of risk management can generate very profitable business growth. However, overall economic growth in these oil-exporting countries has remained steady at 2.4%. The IMF predicts a substantial rise in the price of oil from less than $50 per barrel in 2015 to $74 per barrel by 2020, promising further aid to the regional economy.
understanding risks - expanding in the MENA For companies that project sufficient return on investment for expanding into the MENA region, the next step is identifying the threats to achieving this return. These can include strategic and operational risks (asset expropriation and regulatory and tax impositions); financial risks (currency exchange fluctuations, contract repudiation and non-payment of monies owed); cultural risks (failure to negotiate in the ways foreign business partners expect to negotiate); and reputational risks (revelations that the company paid a bribe, provided a kickback or followed questionable labor practices). As more multinational corporations and regional companies engage in business ventures in the MENA region, risk management professionals will play increasingly important strategic roles. In some cases, risk managers will be called upon to help determine the viability of doing business in the region based on indepth analysis of risk and reward.
top geopolitical risks Economic studies and research state that the main geopolitical risks are focused in these areas: EUROPE • In 2016, a core conflict emerged between open Europe and closed Europe--and the combination of inequality, refugees, terrorism and grassroots politics will pose an extraordinary challenge to the principles on which the E.U. was founded. CHINA FOOTPRINT • Never has a country at China’s modest level of economic and political development left such a vast footprint. It is the only country of scale today with a real global economic strategy. ISIS AND “FRIENDS” • The Islamic State of Iraq and Greater Syria is the world’s most powerful terrorist organization, with followers and imitators in places from Nigeria to the Philippines. But the international response to its rise has been inadequate, misdirected and at cross-purposes. Intelligent Risk - October 2017
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• For 2017, this problem will prove unfixable, and ISIS and other terrorist organizations friendly to its aims will take advantage of that. The most vulnerable states will remain those whom ISIS has explicit reasons to target--France, Russia, Turkey, Saudi Arabia and the U.S.--and those with the largest numbers of unintegrated Sunni Muslims, like Iraq and Lebanon. SAUDI ARABIA’S RIFTS • The Saudi kingdom faces a growing risk of instability, and its increasing geopolitical isolation will lead it to act more aggressively across the Middle East. The threat of conflict within the Saudi royal family is on the rise, the key source of external Saudi anxiety is Iran, its regional rival, soon to be free of sanctions. Now that Iran has responded with open hostility to the Saudi execution of a top Shi’ite cleric, we can expect an increase of their proxy conflicts in Syria, Yemen and elsewhere in the region. Due to the instability and the state of war in the Iraq, Syria, and Libya, the risk of negative developments surrounding the economy has increased in terms of geopolitical risks, especially in the MENA region. The slowdown in the growth of emerging markets will lead to significant drop in oil prices, noting that some of these risks have been met with a significant drop in oil prices.
references References are from advanced relevant risk management websites: • Bloomberg E-Magazine • Marsh “global leader in insurance broking and risk management. We help clients quantify and manage risk – and help them unlock new opportunities for growth”. • Market Watch
author Abdulkareem Sukkari Mr. Abdulkareem Sukkari is a Risk professional with over 17 years of experience in Islamic Banking. He started his career at the International Islamic Arab Bank in late 90’s as a Policies & Procedures Analyst. That progressed into Supervisor & Risk Management and Regulatory Compliance and since then grow into a position of Chief Risk Office. Prior to this Mr. Sukkari was employed by Al Rajhi Bank in Saudi Arabia in capacity of Manager overseeing Operational Risk, Risk Governance and Basel II, where he played an instrumental role in successfully Implementing & managing Basel II project. In his current role he is leading the formulation, development and implementation of the Risk Management Department strategy in support of the bank’s goals and objectives. 010
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world without a leader
by Ajay Prakash Geopolitical risk has historically been talked about in connection with the politically volatile region in the Middle East and socially and economically struggling countries in Africa and Asia; however, interestingly, recent political developments in the US and Europe have made the developed western world a source of geopolitical risk for the rest of the world. With the collapse of the Soviet Union from the recent memory, and for at least the past few decades, the United States has arguably been the only super power and has become the leader of the world in many ways. The US has been a beacon of innovation, entrepreneurship, education, human rights and democratic values. Even though the country has been criticized at times for its hegemonic approach and political pundits can differ on the overall impact of the US’ foreign policies, there is no denying the fact that US leadership has provided an order to the global political and economic affairs; without this order the world could have been in complete disarray and chaos. Under the current administration, the US is revisiting its terms of engagement with the world, such that it’s trying to reshape several long-standing policies, treaties, and ties in order to make them friendlier for the US and its people. As the US gets into a protectionist mode through renegotiating trade deals, reforming immigration, or redefining old political ties, the country’s position as a world leader has come under question and the entire global diplomatic order has started shaking. The US’ shift in foreign and economic policies emanates an atmosphere of uncertainty which creates a potential geopolitical risk for the businesses and investors around the world. Historically, energy and currency markets have been the two most
consistently impacted markets by geopolitical risk, but the new geopolitical risks could impact a much wider range of industries and investors around the world. For instance, in the wake of forthcoming changes in the US visa laws, the Indian IT industry is facing a slowdown with over 200,000 IT employees expected to be laid off in the next 2-3 years. This could impact India’s GDP growth by up to 0.5%, slowing down one of the fastest growing economies in the world. According to the recent IMF study - World Economic Outlook Update, July 2017, economic growth forecast in the United States has also been revised down from 2.3% to 2.1% in 2017 and from 2.5% to 2.1% in 2018.
At the same time, Europe is also struggling with internal differences on immigration, economic growth, political instability and religious extremism. Britain’s exit from the EU is just a manifestation of the differences in ideologies, priorities, and sense of identities.
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The US Presidential election outcome and Brexit have led a major shift in the two countries from being among the most trade-friendly, immigrant-welcoming to more turf-protecting and inward-looking countries in the world. The US and the UK are taking a more protectionist approach together, but it doesn’t seem to be strengthening the transatlantic partnership, which has been a center-stone of progressive democratic and humanistic values since World War II. Probably it’s too early to say if these developments will stop or slow down the juggernaut of globalization, but they definitely present an alternative to the last two decades’ mantra of globalization, which led to unprecedented increase in international trade and human mobility across borders. As the US is redefining its role on the world stage, regional players such as Russia and China are rising to fill up the vacuum, at least in their own geographical regions. While Russia is active in Eastern Europe, China is flexing muscles in the South Sea. At least in the present scenario, these regional leaders do not present an alternative to the US leadership as they lack the economic might and diplomatic ties that the US has around the world. Moreover, their questionable record on democratic and human rights measures make them unappealing as world leaders. Businesses need to be aware and observant of the developments and agile enough to respond and adjust their exposures before any major geopolitical crisis unfolds. They can also focus on building more profitable and resilient businesses, as that’s what they have control over.
author Ajay Prakash Ajay Prakash is a Vice President at Nataxis. Mr. Prakash has been working in Energy Credit and Banking space since 2009. Prior to joining Natixis in 2015, Mr. Prakash worked with several international banks such as Crédit Agricole CIB, Macquarie, and Societe Generale. Mr. Prakash has an MBA from Jones Graduate School of Business, Rice University and a bachelor’s in Mechanical Engineering from Delhi Technical University, New Delhi.
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geopolitical risk in today’s world - a new elephant in the room
by Sharon Hufnagel According to a recent McKinsey Global Survey on globalization1, in the space of two years, the share of organizational respondents identifying geopolitical instability as a very important factor affecting their businesses has doubled - the largest increase for a given trend since the start of the survey a decade ago. This perception is the result of multiple contributory factors.
“Covfefe” butterfly effect On May 31st, the President of the United States issued a midnight tweet that caused a sensation across the nation and around the world, producing a long-lasting effect. Millions of people were deluged in a tsunami of reactions, with politicians and economists pushing agendas, media pundits rabidly deciphering the “secret code” hidden, and social media diving into a frenzy of virtual fist fights. The “butterfly effect” is a term used in weather modeling to describe how the sensitivity of small changes in initial conditions can create significantly large effects at a later stage. In that sense, the “covfefe” tweet demonstrated that the butterfly effect can be a profound phenomenon in geopolitical risk.
new elephant in the room Often triggered by “extreme tail” events, geopolitical risk can set the stage for radical changes to the domestic and global economy and financial structures. Defined as the macroeconomic and financial consequences of global political instability, it crosses boundaries of political risk and economic risk. Making sound risk mitigation decisions by analyzing the broad range of possible reactions and counterreactions to potential events is an important aspect of geopolitical risk management. As geopolitical risk is being pushed up on the agenda for executive boards and organizations, it is time for us to ponder a better way of managing the risk. Particularly in today’s world of uncertainty, with the nature of geopolitical risk constantly evolving, we need to face a new elephant in the room – technology, and its impact on geopolitical risk.
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a double-edged sword Technology presents both challenges and opportunities. While social media, artificial intelligence and big data have propelled innovation and social development, they have also allowed cyberattacks to be more possible, making the deciphering of good data, information and intelligence from the bad a very arduous task. Mark Suster, a successful entrepreneur and venture capitalist, cited in a blog post2 that over seventy percent of all statistics were made up. He proclaimed this without fanfare a couple of years ago using Nielsen’s analytics. Our data woes have only multiplied today, with “fake” information stemming from all areas of social media, and with state-sponsored cyber wars that currently constitute a significant part of geopolitical risk itself. As a general practice in risk management, sets of risk factors and indices are identified as proxies to analyze variables. Since politics and social economics are influenced by human behavior and the sudden confluence of events, qualifying and quantifying geopolitical risk is not an easy task. By the same token, constructing historical and hypothetical scenarios to anticipate the ramification of potential geopolitical chaos can be equally difficult. Given that today’s political realities are likely to be obscured by media hypes or poll results, and that, more often than not, information is obtained “ex post” instead of “ex ante,” added to which data silos frequently lead to development of different, if not contending, analysis results – these realities have rendered the effectiveness of traditional risk management models limited. Every day, amplified, skewed and misinterpreted data and information quietly find their way into the vast quantity of aggregated political and economic intelligence, and are in turn used as trusted indices, risk factors or the basis for scenario construction, playing key roles in the life cycle of geopolitical risk analyses, determination and mitigation.
new approach needed Geopolitical risk is a fusion of both political risk and economic risk. While such economic variables as Per Capita Income, Balance of Payments, National Debt, or even Gini Coefficient3 are available, there is an urgent call for the emergence and formalization of a new classification of data. There is the need for carefully defined indices and well aggregated reports that can take into consideration the sensitivity of geopolitical events and their triggers, capable of looking at financial impact at a more detailed level, yet with a holistic view. Think again about the “covfefe” phenomenon - would the light-hearted side of the sensation still remain if the President’s tweet were about “nukefefe”? How do we qualify and quantify the potential risk resulted from such a butterfly effect? From President Trump’s internal and external policies to China’s defense for free trade and the fight for South China Sea; from the insurgency of populist forces in Europe to Russia’s intention to expand abroad, and its potential confrontation with NATO; from Pyongyang’s growing missile capabilities to Turkey’s failed coup and President Erdogan’s consolidation of power - today’s unique and unprecedented geopolitical risk is penetrating every aspect of the intertwined political and economic supply chains.
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The sensitivity of its nature, the broadness of its range, and the immenseness of its interconnectedness, make a compelling call for greater “availability”, “timeliness” and “accuracy” of quality input as well as output data in risk management models. When facing the quintessential mission and escalated importance of managing geopolitical risk as a means to minimize potential adverse financial impact, organizations big or small need to confront this new elephant in the room, working together to identify disruptive factors unique to specific regions, organizations or markets, accessing scenarios based on comprehensive analysis of impacts, and driving technology as a positive force in geopolitical risk management.
references 1. “Geostrategic Risks on the Rise” – McKinsey & Co survey, May 2016 | Link here 2. Business Insider, 17 February 2010 | Link here 3. The Gini coefficient (sometimes expressed as Gini Ratio) is a measure of statistical dispersion intended to represent the income or wealth distribution of a nation’s residents. It was developed by the Italian statistician and sociologist Corrado Gini (Wikipedia)
author Sharon Hufnagel Sharon Hufnagel is a Managing Partner of eLambda LLC, a financial risk management consulting company. With passion in thought leadership, Sharon is a firm believer that good risk management is a balance between qualitative and quantitative analyses, business and methodology models, as well as finance and technology. Currently working in area of quantitative risk management, she has been playing a key role in market, credit, and liquidity stress testing in a CCP environment. Her latest focus is on systemic risk and its interconnectedness.
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careers in risk: PRMIA panel offers expert advice What are the non-technical skills I need? Do I need to be a quant? How do I get to become an MD in Risk Management at my bank? These are samples of many questions that came up in May when PRMIA organized a “Careers in Risk” panel event in New York for members and non-members. Hosted by PwC and moderated by Michael Alix, PwC FS Advisory Risk Leader, the evening brought together over 75 guests and risk practice leaders from three top Executive Search firms, who were asked questions from both the moderator and a lively audience. The panelists, Lisa Zonino, Partner, Financial Services Practice Group at Egon Zehnder; Robert Iommazzo, Managing Partner at Seba International; and Bryant Yao, VP, Quant and Risk Recruitment at GQR, each provided insights into what their financial services clients are looking for in the skills and competencies of risk managers at all levels. One key take-away is that the role of a risk manager has become highly complex and the competencies required are broader than ever before. As the role of a risk manager has become far more front and center in an organization, so has the influence that he or she bears on the decisions and decision-makers. Combined with the increased regulatory oversight of the industry, risk leaders today must demonstrate far greater influencing skills and other interpersonal attributes than was previously expected. Moreover, given the range of subjects that come under the “risk management” banner – and FinTech, digitalization, cyber security are now added to this list – the risk manager of today needs to be able to both understand and explain to his peers about a vast array of interrelated and complex issues. The panelists also had sound advice for those embarking on a career in risk, with the strong recommendation to get as broad an experience in as many of the risk functions as possible and to undertake training where offered, along with acquiring risk certifications as needed to achieve mobility in the risk management arena. The success of the panel event in New York resulted in a similar event being delivered in London a few weeks later. Moderated by Kathryn Kerle, Chair of PRMIA London Steering Committee and Head of Enterprise Risk Reporting at RBS, the same Executive Search Firms were represented by the heads of their respective London risk practices, namely Rustum R. Bharucha, Director at Seba International; Max Soslove at GQR; and Rian Raghavjee from the evening’s host, Egon Zehnder. “Both these events demonstrated that the role of a risk manager continues to evolve,” concluded Keith Waitt, organizer of both evenings, “and we must all be able to follow a less linear career path as the risk function continues to develop in new directions. However, what fundamentally will never change is the need for each of us, at whatever level and discipline, to be sufficiently trained and thus skilled and competent so we are prepared for these changes and industry developments.”
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managing organizational geopolitical risk in a globalized world
by Vivek Seth, PRM We live in a globalized business environment with higher trade synergies than ever before. Yet this very same business interconnectedness implies that geopolitical events such as civic unrest, terrorism, violent conflicts etc. in one part of the world now have a much higher impact on the rest of the world. Organizations must be aware of, and prepare for geopolitical risks, in both domestic and international arenas, else they may be caught off guard during developments such as China’s recent territorial disputes in the Pacific rim, Brexit, Trump’s victory defying conventional forecasts, Russia’s entry into the Syrian civil war, all of which had far reaching international consequences. According to the Clements Worldwide Risk Index 2017 Winter/Spring1, the number of organizations suffering the effects of political violence nearly doubled (90% growth) in the past 12 months. Terrorism and political violence are amongst the top 5 risks to which respondents (multinational organizations’ executives responsible for global risk management) feel least prepared to address. The Global Risk Report 2017 by the World Economic Forum2 also notes that societal and political polarization looks to be a determining feature of the political landscape not just for the next few years but for the next few electoral cycles. The consequences of not being adequately prepared for geopolitical risks can have immediate impacts (short-term financial market volatility, currency fluctuations, physical asset damage, supply chain disruption, personnel safety issues etc.) as well as long term impacts (new regulatory prohibitions, taxation/tariff hikes, nationalization of assets, economic sanctions effects, trade embargoes etc.). Managing geopolitical risks is therefore crucial to firms’ long term survival and success. Geopolitical risk is hard to measure and monitor. Detailed study report with historical & current political, social & economical information may not be feasible for each country. Even when such case studies are available, its precise correlation with events occurring in other parts of the world may not be accurately quantifiable. When geopolitical risk is measured via indirect metrics (domestic financial market volatility, local currency fluctuation, gold price index etc.), these indicators may be distorted by external factors (unsubstantiated media reports, home government policies impacts etc.). Qualitative assessments done based on internal analysis, dialogue with external experts tend to be subjective by nature. To make it further complicated, events like terrorism, rise in nationalism, large scale civil protests, government shut-down that previously were confined to high-risk areas of the world, are now spreading to every jurisdiction. Restricting business presence to Western democratic nations may not necessarily imply significant reduction of geopolitical risks.
1 / Source: Clements Worldwide Risk Index Reveals Top Losses for 2017, Mar 2017 (link). 2 / Source: The Global Risks Report 2017 12th Edition, World Economic Forum (link).
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In this context, the author proposes effective geopolitical risk mitigation via a combination of the following five strategic measures: Managing organizational geopolitical risk
1. Diversifying business operations Spreading supply chain operations across locations and having a broad customer base wherever feasible. While having logistics base at cost effective locations and having reasonably priced vendors enables organizations attain higher bottom line, alternate areas of operations and vendors are also crucial in dealing with uncertain events. 2. Capital allocation for geopolitical risks This approach helps against political risk/trends that are not immediately apparent (e.g. Brexit impact in upcoming years). Such reserve allocation should be done keeping in mind the institutions’ risk exposure (operations in emerging market, shelf life of products, life cycle of sales etc.). 3. Political risk insurance Buying insurance can protect firms against impacts to physical assets, equity investments, contracts for goods & services as well as coverage on terrorism and war. This helps management concentrate on business fundamentals while limiting political risks. Based on its risk appetite, the firm can determine how much premium it is willing to pay for the insurance. 4. Periodic monitoring of political risks This could be based on in-house research (if feasible) or via the help of external consultants. This approach assists a company in assessing geopolitical trends vs. its risk appetite. This way the organization can timely adapt, prepare and protect against emerging business uncertainties.
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5. Geopolitical risk incorporated in incident management plan The incident management framework should lay down guidance principles in dealing with geopolitical crisis situations (just like in other emergencies like fire etc.). Emergency planning could include information such as who would make decisions, planning for alternate areas of operations, emergency funding agreement with banks/suppliers/vendors etc.
Bringing it all together: We live in an era of increased uncertainty driven by rising nationalism, unexpected election outcomes, social unrest and terrorist threats to name a few. In today’s interconnected world, the impact of these events can’t be avoided but certainly can be managed. Organizations can protect against geopolitical risks via strategic planning ranging from diversifying business, allocating reserve for uncertain events, buying insurance, periodically assessing geopolitical risk against its risk appetite and finally, having a crisis management plan in place. When things head south, careful planning would enable organizations to not only survive but make the best out of a bad situation.
author Vivek Seth, PRM Vivek Seth is a Singapore citizen who has been working primarily in the Risk Management area for about 13 years. Currently working in Financial sector in Singapore, his work experience extends across Singapore, Australia and India, along with business assignments carried out in Hong Kong and Switzerland. He holds an M.B.A. and also the PRM and C.A.M.S. professional certifications. This article is written as part of author’s pursuit in the literary field. This article presented here represents author’s personal views and not those of his current/previous employers or that of any professional bodies he is associated with.
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geopolitical risk framework
by Roopak Hooda, CFA, FRM, PRM Geopolitical risks encompass everything from a change in domestic policies within the developed and emerging markets to international conflicts and wars. These risks will create volatility across the financial systems as markets are closely connected. An extended geopolitical risk will have a devastating impact on the overall economy that will eventually cause global economic downturn. The market shocks triggered by geopolitical risks can have short-term to long-term economic impacts depending upon the nature of the risk. For example, a short-term shock due to Brexit from European Union disintegration can have a huge consequence on the global markets and a long-term shock will be due to evolving risk from North Korea missile launch can easily expand to an economic crisis not just in Korean peninsula or in Asian markets, but will have a wide-spread impact across the US and EU. Cyber risk is another example of evolving geopolitical risk where a multinational company or even Government agency, experience loss of business assets due to hacking of sensitive information. In order to mitigate the impact of this risk, business organizations must work with government policy makers to create a robust geopolitical risk framework and integrate within their portfolio management process. Failure to identify and quantify and take appropriate action, when necessary, can possibly result in large losses for investors. Moreover, if priced correctly in the asset risk premium, it can provide buying opportunities for the investors.
the five steps to effective geopolitical risk management Identify and define the event
Quantify
Communicate
Integrate
Monitor
Geopolitical risk framework consists of five critical steps: 1. Identify and define the event 2. Quantify the risk by forecasting relevant risk factors 3. Communicate the results to senior management 4. Integrate the risk analysis within the investment strategy 5. Monitor the risk factors regularly
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identify and define the event Geopolitical risks are hard to define, let alone identify the scope of the risk, because they are driven by different interrelated as well as external factors. Understanding these interrelated factors will be critical in defining the geopolitical event. Every day statements and decisions made by world leaders influence world markets and asset prices. First, one should consider the relevant events based on the company’s portfolio positioning and risk appetite.
quantify the risk Next, probabilities are assigned to these events in the current market environment. In addition to the probabilities, it is critical to understand the velocity of the event: how fast the event could manifest. Velocity is an important aspect in the risk framework because it provides us a point estimate of reaction time for the risk. Once a probability and velocity are assigned to the event, the next step is to quantify the overall impact as if the event were to occur today. First, translate these political news headlines into observable economic and market factors such as GDP change, inflation change, spread change, S&P return or VIX change. Historical market value change or simulation based methods can be utilized to calculate portfolio loss by stressing macroeconomic or market factors. Historical market value based estimation provides a non-distribution based view. A multi-asset portfolio generally exhibits non-normal behavior. The historical market value method captures the non-normal behavior of the portfolio loss and can be leveraged when attempting to model geopolitical risk. An event can have a multi-year impact on the portfolio and can trigger other events such as protectionism or trade conflicts. Therefore, it is critical to understand the total duration of the geopolitical risk in order to define a recovery path of the event. One way to analyze the through-the-cycle impact of a geopolitical risk is to include a multi-year multi-faceted stress test method in the framework. This method can provide a unique, but realistic, estimate of secondary stresses and losses triggered by geopolitical risk. Finally, it is important to sensitivity test input assumptions. Sensitivity analysis provides a range of possible results since the risk factor point estimates can change.
communicate to senior management Multinational corporations must proactively establish the crisis management teams to understand the events on an evolving basis and board level discussion are imperative to understand the scope of these risks.
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Once defined and quantified, the geopolitical risk should be communicated to the senior management. Based on the overall risk appetite of the organization, senior management can make a decision on whether to take action to mitigate exposure to the risk or remain exposed.
integrate with investment strategy One of the most critical steps in the framework is to integrate the risk analysis process with the investment portfolio strategy. This type of analysis could be used for short-term risk mitigation actions, such as hedging, but it can also inform the investment team on how to reposition the portfolio for the long-term.
continued monitoring The final step in the risk framework is to monitor these risk factors and assumptions over time. As the geopolitical risk unfolds, existing risk factors can be replaced by new risk factors. In addition, assumptions such as probability of occurrence and velocity may need to be revisited. Effective risk management includes reviewing these factors and their impact on a regular basis.
conclusion Geopolitical events have become vital risks to measure in an increasingly globalized market. These risks have potential to cause systemic impact across the financial markets. Failure to take appropriate actions can put multinational corporations at a highly competitive disadvantage or possibly even result in default. Therefore, it is important to incorporate the five steps of the geopolitical risk management framework in the investment decision-making process.
author Roopak Hooda, CFA, FRM, PRM Roopak Hooda is currently AVP, Risk Manager at HIMCO (Asset Management arm of The Hartford). He has more than 10 years of extensive experience in Investment portfolio risk. His areas of expertise includes credit risk, liquidity risk, quantitative modeling and framework, and stress testing. Prior to his current role, Roopak worked as a market risk specialist for multi-asset portfolio at Aviva Investors. He holds a Master’s degree in Business from University of Iowa and Master’s degree in Process Engineering from Indian Institute of Technology, Delhi. Roopak is a CFA charter-holder and a certified Financial Risk and Professional Risk Manager. Intelligent Risk - October 2017
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a credit analysis of Brexit
by Eduardo S. F. Alves In June of 2016, Brexit sent shockwaves through the financial markets, calling into question the future of the European Union. The recent snap election prompted by British Prime Minister, Theresa May, resulted in more dismay than certainty as Britain prepares exit talks with the EU. With the final deadline for Britain’s departure from the union set for 2019, S&P Global Market Intelligence conducted an analysis using macroeconomic indicators and the Credit Analytics tool by looking at key developments in the Brexit timeline.
economic performance The initial expectations about the impact of the “Leave” campaign success at the Brexit polls on June 3rd, 2016, were of total economic calamity at the time. However in February 2017, only 6 months after cutting the benchmark interest rate to 0.25% and increasing the quantitative easing program, the Bank of England bullishly raised its forecast for growth. It is a positive sign that the monetary policy is working as expected, but this scenario is unlikely to last past the medium-term due to decreasing investment and lingering uncertainly around Brexit negotiations1. Political developments in Europe captured recent news headlines but attention might soon return to the United Kingdom. Economic indicators point to a robust economy in slow recovery, but risks loom ahead. The unemployment rate continued its recovery trajectory despite Brexit. The rate was measured at 4.4% in February 2017, the lowest rate since 2015 and nearly half of the crisis-era unemployment. The average year-on-year monthly inflation rate for the first half of 2016 was a meagre 0.34%. This number significantly picked up after the Brexit vote, reaching 2.69% by April 2017 – buoyed by monetary policy, decreasing unemployment, and a weaker pound. Higher inflation won’t be welcomed by everybody though. Unemployment is going down but real wages now suffer downward pressure from new inflationary forces. In fact, real wages growth turned negative in April 2017.
1 / S&P Global Ratings (May 30, 2017) “Economic Research: Yet Another bad Year For U.K. Real Wages, And Maybe More To Come”
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Post-Brexit depreciation of the pound is likely to help British companies’ competitiveness abroad and reduce the persistently negative current account deficit. A weaker pound should boost exports and restrain imports. The current account balance graph shows the immediate impact of the pound’s depreciation on Q3 2016, reaching a deficit of 6.21% of gross domestic product as imported goods became more expensive. Current account subsequent tightening as exports increased in the following quarter. Roughly 45% of UK exports are EU bound; thus the outcome of Brexit trade negotiation will ultimately determine the overall impact. Meanwhile, foreign direct investment (FDI) is one of the main sources of financing for the UK’s current account deficit and roughly two-thirds of it goes into the financial services sector. Given the potential direct impact of Brexit on this sector specifically, the current account deficit could widen despite higher competiveness of exporters.
market response Turning to market indicators post-Brexit vote, the S&P Broad Market Index (BMI) is a rules-based index of stock market performance. Looking at the S&P BMI for the UK, Germany, and Europe – all indexed to the Brexit vote date – it is possible to see that so far investors have been perhaps more concerned about Brexit’s impact on the EU or other EU specific risks. While initially all indices dropped following the vote, this drop was largest for Europe while the UK managed to recover shortly afterwards. Though Germany was slower to recover, likely due to its role in Europe, it is now the best performing index. Europe only regained the initial losses recently. Investors’ concern regarding Europe is also evident when looking at volatility indices. Both the FTSE 100 Volatility Index and the Euro STOXX 50 Volatility Index recovered since the Brexit vote; however, volatility for Europe peaked higher following the UK’s triggering of Article 50 of the Lisbon Treaty.
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sector specific risk The Probability of Default Market Signals (PDMS), measures the market-implied credit risk of a publicly listed company based on its stock price volatility, measured as a 1-year probability of default (PD). Looking at the median PDMS output for all listed companies in a country by sector is an intuitive approach to measure overall risk in a specific sector – as above all measures are indexed to the day of the Brexit vote. As expected, risk increased in all sectors the days following the vote. The Real Estate sector suffered by far the largest increase in risk, roughly 300%. Interestingly, Real Estate risk remained above pre-Brexit vote until February 2017, much later than observed in other sectors. Financials and Consumer Staples sectors followed similar trajectories, though with slightly different magnitudes. Risk in the Financials sector increased by roughly 60% initially before gradually decreasing. This may come as a surprise to some as Brexit is likely to have a long-lasting impact in the British financial sector. Risk in the Consumer Staple sector decreased the most during the same timeframe, down nearly 75%. The Utilities sector stands out as having the largest peak, a whopping 459% increase, and it is also the only sector in which market-implied risk is now higher than it was on the day of the Brexit vote.
The source of data for all graphs is the S&P Capital IQ platform as of June 6, 2017. Content including credit-related and other analyses are statements of opinion as of the date they are expressed and are not statements of fact, investment recommendations or investment advice. S&P Global Market Intelligence and its affiliates assume no obligation to update the content following publication in any form or format.
author Eduardo S. F. Alves Eduardo Alves is a Director and analytical leader in the Risk Services group of S&P Global Market Intelligence. He partners with financial institutions of varying sizes and specialties to design and deliver risk management solutions. Prior to this, Eduardo was a consultant at Promontory Financial Group helping banks with stress testing needs, conducted credit analysis at Mizuho Bank in support of commercial loan originations, and contributed to World Bank publications through research and statistical analysis. Eduardo holds a Master of Science in Economics from The University of Essex (England) and a Bachelor of Arts in International Affairs and Economics from The George Washington University (United States).
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PRMIA Chapter Profile - Lahore-Islamabad chapter Geopolitical Risk and CPEC
by Fahad Zafar CPEC – a geopolitical initiative Understanding geopolitical risk is important in a world that has become more closely intertwined due to the rise of globalization, and has a direct relationship to the amount of risk investors are willing to take. One of the most significant geopolitical initiatives currently underway is the China Pakistan Economic Corridor (CPEC), a collection of infrastructure projects (modern transportation networks, numerous energy projects and special economic zones) worth USD 62 billion under construction throughout Pakistan. This infrastructure investment will boost economic growth and employment and is considered fiscally neutral. The Islamic
Republic of Pakistan has a population of over twenty million and is one of the seven declared nuclear powers in the world. Its foreign debt is stated to be over USD 60 billion. The strengths of its economy include a large domestic market, access to financial support from the USA and multilateral agencies (e.g. the IMF), and strong hard currency remittances. Its weaknesses are susceptibility to natural disasters, dependence on rain-fed agriculture, large fiscal and trade account deficits, a weak business environment and poor domestic and regional security (such as regular skirmishes on its borders with Afghanistan and India).
China’s regional strategy China is playing a significant role in the Asian region in terms of economic uplift and regional stability, positioning itself as an upcoming economic giant and potential super power. In Pakistan, China is countering traditional US dominance through the accomplishment of CPEC. It is also developing its under-developed North-Western province Xinjiang, which is engulfed in a separatist movement led by Uyghur’s Muslims. Socio-economic activity in the region is part of its strategy to curtail aggressive sentiments against its central government. China imports most of its oil supply through the Strait of Malacca, which is prone to the imposition of naval blockades by East Asian countries, choking China economically. CPEC, through Pakistan’s deep-sea port Gwadar, would serve as an alternative to the Strait of Malacca. China’s installed capacity in steel, cement, bulk chemicals and heavy machinery is perceived to be under-utilized. CPEC provides usage of this spare capacity by building infrastructure in neighboring countries.
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China is exploring new markets in Central Asia and Africa, as its traditional exports to destinations in OECD countries continue to fall. Consequently, China has pledged to invest up to USD 57 billion in Pakistan’s rail, road and energy infrastructure, through its vast modern-day Silk Road network of trade routes linking Asia with Europe and Africa. Pakistan’s debt and other repayments on the CPEC initiative will peak at around USD 5 billion in 2022. This is expected to be offset by transit fees estimated at USD 6-8 billion per annum (including toll tax, rental fees etc.) charged on the new transport corridor. China and Pakistan are currently deliberating on a contingency arrangement using a currency swap agreement between their central banks, to create a mechanism which avoids any third currency in international transactions, and which will work as a buffer or cushion to avoid or prevent any kind of default that could happen in unforeseen circumstances.
Middle East tensions Pakistan is facing a Catch-22 situation as a result of the recent embargo enforced on Qatar by a Saudi Arabia-led group of countries, due to Qatar’s financing of terrorism-linked entities operating in the Middle East. On the one hand, Pakistan has a cordial relationship with its neighbor Iran, an excellent relationship with Qatar, and a brotherly relationship with Turkey. On the other hand, Saudis have deep rooted relationships with all stakeholders inside Pakistan. Qatar has signed huge agreements with the Government of Pakistan for the supply of liquefied natural gas (LNG) as input for new upcoming LNG power plants and other commercial establishments. Cash-rich Saudis have established an International Islamic Military Alliance by recruiting top leadership from Pakistan. It is therefore difficult for Pakistan to side with either of the two groups. Internal politics are also a factor. Even though Pakistan’s Prime Minister Nawaz Sharif is facing a money laundering investigation by the Supreme Court, which makes it difficult for the country to attract FDI, the state-owned Chinese Entities are bringing in investment to develop infrastructure inside Pakistan. Pakistan’s Stock Exchange is going through turbulent times, and every small or big news creates dips in the market index. The Pakistani currency has also been showing a decreasing trend for the last year. Meanwhile, media reports in March 2017 suggested that at least thirteen independent power producers (IPP’s) have invoked the sovereign guarantee of Government of Pakistan, due to long outstanding dues by the central power purchasing authority.
high returns involve high risk Since China is investing in huge numbers, ordinary investors should be willing to play the high risk - high return game. Though the policy of being too cautious is the greatest risk of all, ordinary investors may also like to keep an eye on the regional security and political stability, to avoid putting all their eggs in the CPEC basket.
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recent chapter event In April 2017, the PRMIA Lahore-Islamabad chapter hosted a seminar at a local university on CPEC, moderated by Fahad Zafar, Co-Regional Director Azizur Rehman and Deputy Director LDA Obaid Iqbal.
Thank you to all our volunteers of the PRMIA Lahore-Islamabad chapter! Regional Directors • Aziz Rahman, Ex Chief Risk Officer, Crescent Commercial Bank • Fahad Zafar, Executive Manager, Ernst & Young (EY) Steering Committee • Abrar Saiyed, Treasury Expert, Asiacell • Ferzan Ali, Deputy Regional Director, AMEE • Muhammad Ali Khan, Manager, Mobilink • M. Imran Siddique, Risk Reviewer, Allied Bank • Sheraz Rafi, Credit Manager, United Bank • Shoaib Rashid, Credit Risk Manager, Habib Bank • Suhail Iqbal, Trainer, SysComp
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author Fahad Zafar Fahad Zafar is the Chairperson of the PRMIA Global Council of Regional Directors and an industry expert with over thirteen years of experience on strategy, finance and risk related topics. He has BSc (Hons) Middlesex University (UK) and MBA Bradford University (UK). He is an Ex Chief Risk Officer of a commercial bank and is currently working for the local franchise of Ernst & Young (EY).
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CRO. superhero. the rise of the generalist
by Brian O’Donoghue Superhero. Who knew? In thinking about the powers of a CRO, Wikipedia tells me of a comic-book superhero named Risk, with six times the speed and senses of an average human and who is always hyper. As a risk generalist in a highly regulated start-up investments company, that sounds right! CRO superpowers must be true because at some point in a Board meeting we have all surely dreamed about the power of flight. Or lasers. I’m an operational risk generalist and when starting the role, everything pointed towards modelling and statistics, so I wanted to write about The Rise of the Risk Generalist, which, apart from sounding like a truly bad sci-fi movie, echoes both my own experience and that of many who got the tap on the shoulder to say they were now the CRO. I took the role with twenty years of experience across finance, IT and project management which were both useful and necessary. Depending on your company you may even stray into COO territory. If you recall in the movie The Matrix, they had an ability to upload instant knowledge by plugging into their brains directly. When tapped up for the risk role, I eyed my USB cable hopefully on the one hand, but in the end settled for using what I had in my experience that might help and resolving to ask around to see where I would even start. A typical Irish instance occurred and it’s why I love being from a smaller country. It turned out the Global Chairman of PRMIA, Justin, lives literally down the road. Here endeth the lesson. Connections! Very quickly I was able to engage twenty years of experience, join PRMIA, set up the framework, ply the ever helpful Justin with coffee and questions, attend the EMEA Risk Summit in London, get certified as an ORM, meet other risk people and more importantly, apply it all in real-time every single day. I see the current risk generalist needing to have previous experience. In time, the role could begin with a more specific graduate programme but for now the generalist must bring experience to bear such as lead a team, be decisive but the right time, be a communicator and influencer, have the testing abilities of an auditor, understand behaviours, approach different people in different ways, be aware of affecting strategic Board decisions and if you are in a smaller company like me, use all those abilities to be head of Risk, head of IT, data protection officer, look after cybersecurity and be responsible for business continuity. On to this add a need for understanding of conduct and culture and it’s an understatement to say it’s a varied, demanding, but very interesting role.
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I’ve never been more aware of the geo-political situation since taking the CRO role and how it trickles into the workplace and I have my surfboard for the waves of regulation ahead. I heard of a clever CRO getting the IT budget to take on the expense of risk software to cope with regulation but I’m lucky, I’m head of both! What about the future? I visited my former university and didn’t see an awareness of risk and how it fits in to financial and other areas. I think if you can do it, I recommend getting the word out to not just your former universities, but local schools and start-ups, who would (or should), embrace the range of experience available from an operational risk CRO. I think the risk officer of the future challenge and hackathons are a great idea and I hope to bring that to my former university as a project. Within PRMIA, I know it’s being reviewed, I think sooner rather than later the PRM role should be a twin stream, the existing one for the modeller and a second generalist one to include cybersecurity and Fintech. I’ll be your first student. All roles, including CRO, need to look outside of their company and meet other people in different industries, to freshen perspective. I met NASA astronaut Chris Hadfield (imagine the risk assessments for the space station?!). An impressive and utterly nice man with a titanium grip handshake, I asked about the risks of getting back to earth in the Soyuz capsule which is older technology, so he mentioned the thousands of hours of experienced engineers, training and checks as mitigation. He very drily added that there wasn’t much choice, it was the only way back! Similarly as a CRO, I believe you need to make the best decision from what are sometimes less joyful options. For me personally, I’d rather do that than be paralysed by indecision, so it’s a constant battle. My ultimate risk role outside finance must surely be in the space industry. NASA mission controller, SpaceX, Blue Origin, Virgin Galactic and Stratolaunch are fascinating to watch in these sectors. What an amazing challenge and responsibility a risk or operational role would be in these areas. PRMIA Houston, I hope you have contacts at Johnson Space Center, I’ll be over for a visit.
author Brian O’Donoghue Head of Risk & Technology, BlackBee Investments
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what does banking disrupted mean to you?
by Andy Condurache & John Anderson PRMIA announces collaboration with Silicon Valley Innovation Center on the Banking Disrupted Conference There are many questions we face amid industry disruption: What will banking look like in 5 years? Where is risk aggregating in FinTech? When and what will be the cause of the next systemic failure? Will robots be the risk managers of the future? Our Community has explored these questions, and more, over the last few years to help our organizations while guiding our careers through disruption, either as the disrupted or the disruptor. Now, PRMIA is collaborating with the Silicon Valley Innovation Center on Banking Disrupted, an event drawing from the ranks of industry executives, prominent venture capital firms investing in disruptive technologies, and innovative start-ups and incumbents transforming financial services. With PRMIA, all the players in the Community come together for dialogue with the risk manager lens. After all, our industry is one based on risk transfer, and risk managers are well known for asking hard questions and expecting sound answers. Through this lens we will explore a vision of the future of banking, emerging technologies and their impact on the bank, changing business models in the industry, new entrants, and corporate innovation. We seek your input to help sharpen focus and ensure we have the broadest possible perspective. Visit www.prmia.org and go to Online Community to join the conversation and share your thoughts on disruption.
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authors Andy Condurache
John Anderson
Steering Committee Member, PRMIA NY, Banking Disrupted Advisory Committee Liaison, and Director of Finance, Lateral.Inc
Steering Committee Member, PRMIA San Francisco, Banking Disrupted Advisory Committee, and Senior Vice President, Corporate Strategist and Advisor, Blaylock Van, LLC
PRMIA thanks the Banking Disrupted Advisory Committee for their role in shaping the agenda • Bruce Fletcher - Chief Risk Officer, Global Retail Banking and Wealth Management • Bob Mark - Founding Partner and Chief Executive Officer of Black Diamond Risk • Julian Fisher - Executive Director, Crest Rider • John Anderson - Senior Vice President, Corporate Strategist and Advisor at Blaylock Van • Scott Syphax - President, Syphax Strategic Solution and SVIC Member • Andy Condurache - Director of Finance, Lateral, Inc. • Gerry Gaetz - CEO, Payments Canada • Christine Palmer - CRO, Aldermore Bank PLC
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preliminary results of the 2017 PRMIA job analysis survey
by Mary Rehm The 2017 PRMIA Job Analysis Survey was recently conducted with the purpose of validating the current framework of the PRMTM program. The survey was responded to by 204 risk managers from around the globe. Preliminary results show that nearly 70% of PRM Holders have been in the risk profession for 6 years or more (figure 1), working primarily in the Banking or Asset Management industries (figure 2), and 86% of these respondents are permanent full-time staff members. 45% of the PRM Holders responding to the survey are located in the Europe and Central Asia region, 26% in the Americas, and 16% in Asia Pacific.
Figure 1: Percent of PRM Designation holder respondents and the number of years in the risk profession.
Figure 2: Percent of PRM Designation holder respondents by industry
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Figure 3: Percent of PRM Designation holder respondents by region
In digging deeper into the results, 71% of the PRM Holders who responded to the survey have a job title that is risk related. Of these individuals, 43% changed roles in the last three years and 34% changed jobs into a role that would be considered a promotion. Of this sample, 15% changed roles from Risk Analyst to positions of Risk Manager or Supervisor, Risk Management Consultant, or Chief Risk Analyst. These results are indicative of individuals who hold the PRM Designation being recognized for their expertise in the areas of risk and being given job and promotion opportunities. Interestingly, of the 71% of the PRM Holders with risk related roles who changed their roles in the last three years, 12% of these individuals left a role that was not risk related.
what comes next? The next stage for the PRMIA Job Analysis Study is to further dig into these data and identify updates that may be necessary for the PRM and Associate PRM programs. This analysis will occur during a Test Specifications meeting. In this meeting, a group of subject matter experts who represent the population of PRM and Associate PRM holders will meet to review the data and validate the current programs. The meeting is scheduled for October 2017, and will meet for three days to dive into the data received from the survey. While the primary purpose of the meeting is to use the data to inform how the PRM and Associate PRM programs should evolve, the outcomes will ensure that the credentials continue to hold the value and prestige recognized by PRMIA Members and their employers. The first stage of the test specifications meeting will be to examine the requirements for PRM Candidates, the work and education requirements. The second stage of the meeting is to determine which topics may need to be retired from the syllabus and which topics should now be included. Respondents to the survey were asked to rate the topics on their importance and frequency of use in their role. It is these data that will largely inform the decisions made by the committee on the PRM syllabus.
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The third stage of the meeting is to review the objectives statements that can be found in the PRM Guidebook (downloadable from the PRMIA website). These statements hold much value because they inform the candidates on what is expected of them to know and be able to do; they also inform the training and exam development processes supporting the credentialing program. The last stage of the meeting is to validate the recertification requirements for the PRM Holders. Currently, PRM Holders who achieved their certification after 2015 are required to submit 20 Continued Risk Learning (CRL) credits each year.
what impact can current prm designation candidates expect for their path to certification? Those of you currently working to achieve certification should continue. Any revisions to the PRM Designation program as a result of the Test Specification Committee’s work will be announced once their recommendations are reviewed and approved. There will be a time period with a transition plan to bridge any gap between the current program and any version of the future program. PRMIA will not allow those currently on their certification paths to experience any disruption in that process.
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calendar of events Please join us for an upcoming training course, regional event, or chapter event, offered in locations around the world or virtually for your convenience.
PRM SCHEDULING WINDOW September 9 – December 22
THE LATEST TRENDS & NEXT STEPS FOR MODEL RISK MANAGEMENT October 11 Virtual Training
SUPERCONNECT NETWORKING October 12 in Chicago
RISK CULTURE October 18 in London
VALUE ADDED TAX (VAT) October 18 in Bahrain
OPERATIONAL RISK MANAGER ONLINE SERIES October 18 – December 13 Virtual Training
FINANCIAL CRIMES October 19 in San Francisco
GETTING THE MOST OUT OF YOUR PROFESSIONAL DESIGNATION October 19 in Vancouver
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CURRENT EVENTS OF THE VIX MARKET October 19 in Chicago
FRTB UND IRRBB TAGUNG October 24 in Koeln
OPEN BANKING October 25 in London
FINANCE AND RISK MANAGEMENT CAREER CONFERENCE November 2 in Edmonton
REDEFINING FINANCIAL SERVICES REGULATION November 8 in Washington, DC
REGULATORY STRATEGIES FOR FINTECH November 8 in Washington, DC
TEN YEARS FORWARD, TEN YEARS BACK - PRMIA NETHERLANDS 10TH ANNIVERSARY CELEBRATION November 9 in Amsterdam
2017 CANADIAN RISK FORUM November 13–15 in Montreal
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2017 EMEA RISK LEADER SUMMIT November 13–14 in London
PRM TESTING WINDOW November 20 – December 22
MONTREAL MENTOR PROGRAM December 7 in Montreal
OPERATIONAL RISK SCENARIO ANALYSIS December 14 Virtual Training
2018 PRMIA RISK MANAGEMENT CHALLENGE February 22–24, 2018 in various regions worldwide
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