Traditional risk management methodologies also underestimate systemic risk caused by an increasingly interconnected world. These interdependencies have a contagious effect across countries and financial systems, making crises deeper and recovery slower.
It is no longer enough to simply crunch numbers; risk models should also incorporate the insights of senior managers that have experienced crises first hand.
And risks cannot be looked at in isolation. They tend to combine with each other in “risk clusters” that heighten their impact. Regulators are increasingly seeking more sophisticated risk analyses in stress and scenario testing, particularly for going concern analyses and capital adequacy assessments.
Today’s financial systems are extremely complex, due to globalization, market liberalization and technology. This also makes them more unpredictable, so organizations need systemic risk models and associated controls that:
- highlight emerging risks
- evaluate the potential impact of emerging megatrends such as quantitative easing, aging populations, new regulations, population growth, technological advances and changing weather patterns
- identify the composition and impact of risk clusters.
routinely report systemic risk to risk committees and the board?
employ systemic risk models that embrace current data and future predictions?
produce risk cluster analyses?
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