Risk in Financial Services (RFS)

Chapter 1 Karim Mansour

Principles of Risk Management karim.mansour@tadawul.academy
12 Questions +971-56-2441942
Chapter 1 CISI Risk in Financial Services

1. Introduction to Business Risk

1.1 Risk and uncertainty

•The Concise Oxford Dictionary definition:
-‘The chance or possibility of damages, loss, injury or other adverse consequence’
•Probability – chance or possibility of something happening in the future
•Impact – adverse consequence – the potential outcome is thought of as negative
•Risk
-Variables that can be quantified
•Uncertainty
-Variables that cannot be quantified

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Chapter 1 CISI Risk in Financial Services

Risk Framework Board of Directors

Risk Management
Team

Business Unit
Heads
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 Chapter 1 CISI Risk in Financial Services

Political Risk
Change in government, tax laws, etc can affect financial services

Economic Risk
External Sources Understand human behaviour that will affect the product it sells
Of Risk
(PESTLE) Social & Market Risk
Competitors gaining market share, attitudes to saving/credit/etc.

Technology/Cyber Risk
Theft of, or damage to, information stored on computers

Legal - Stakeholders & Third Parties

Parent company, major investors, large customers

Environmental Shocks & Natural Events

Natural Disasters (floods, earthquakes), terrorism (9/11), etc.
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Chapter 1 CISI Risk in Financial Services

1.4 Internal drivers of business risk

•Strategic risk
Strategic risk is the risk of loss of earnings or
-Is the strategy right? capital via:
-Is it being implemented properly?
•Operational risk •Adverse business decisions
-The risk of loss resulting in failed internal processes •Improper implementation of decisions
•Compliance risk •Lack of adequate responsiveness to changing
-Compliance with regulation and legislation business environment
•A lack of strategic information
•Financial risk
-Revenues vs. cost
-Gearing/leverage
-BIS three main types – credit, market, operational

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 Chapter 1 CISI Risk in Financial Services

1.5 Assessing internal drivers of business risk

•From within the company:

-Structured brainstorming (SWOT)
-Stress testing
-Scenario analysis
-Risk assessment workshops
•External assessment:
-Independent auditors
-Industry best practice

1.6 The nature of external and internal risk

•External and internal risks overlap, and mutually influence one another
- Example – new product development and launch

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Chapter 1 CISI Risk in Financial Services

1.7 Additional risk terminology (cont.)

Risk appetite (risk tolerance)

•Acceptable loss at a given confidence level
•Quantifiable vs. non-quantifiable risks
•Top-down and bottom-up

Top-down approach:
•Identify threats to strategic objectives or goals
•Relate these to the resources held by the firm
•Generate plans to address threats

Bottom-up approach:
•Set departmental ‘acceptable occurrence’ levels for errors and losses
•Develop key risk indicators (KRIs) to track performance vs. target

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Chapter 1 CISI Risk in Financial Services

1.7 Additional risk terminology (cont.)

Inherent (gross) risk

•Risk exposure without controls

Residual (net) risk

•Risk exposure with controls

Risk profile
•Prioritising risks (likelihood and impact)
•Responding to risks (4 Ts)
•Terminate – avoid
•Transfer – outsource
•Take – retain and budget
•Treat – reduce impact/likelihood
•‘Risk profile’ means the overall ‘picture’ of external and internal risks affecting the firm, and proposals to deal
with them.
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Chapter 1 CISI Risk in Financial Services

1.7 Additional risk terminology (cont.)

Risk mitigation – methods to reduce impact/likelihood depending on risk type

•Improve processes (operational)
•Hedging (market)
•Holding collateral (credit)

1.8 Risk management and shareholder value

Risk management helps with accurate decision making

•Proper appreciation of costs and benefits of project decisions

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Chapter 1 CISI Risk in Financial Services

2. Specific Risks in Financial Services

2.1 Risk in financial services (BIS definitions)

•Operational risk
-‘The risk of loss resulting from inadequate or failed internal processes, people and systems or from
external events’
•Credit risk
-Risk relating to lending or agreeing to trade with another counterparty
•Market risk
-Potential loss of earnings or capital arising from a change in the value of financial instruments
•Liquidity risk
-The risk that a firm will be unable to close out a position due to the market being illiquid

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Chapter 1 CISI Risk in Financial Services

2. Specific Risks in Financial Services

2.2 Systemic risk in financial services

•Contagion

•Sovereign risk

•Recovery and resolution plans

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Chapter 1 CISI Risk in Financial Services

2. Specific Risks in Financial Services

2.3 Compared to other industries

•The following impact all industries but affect the financial services industry in particular:
-Reputation risk
-Organisation risk
•Internal complexity
•External interrelationships (contagion)
-Compliance risk
-Conflict of interest

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Chapter 1 CISI Risk in Financial Services

3. Emerging Considerations

3.1 Fintech and Regtech

•Companies use technology to improve the customer experience, and to better compete with their rivals
-Fintech involves the use of technology by financial services firms for this purpose
-Regtech applies this idea to meeting increasing regulatory requirements, such as reporting and
compliance
-But increased cybercrime and data security risks

3.2 Cryptoassets
•Digital assets that do not require intervention by middlemen, and uses decentralised distributed ledger
technology (DLT), such as blockchain
-Unclear or no regulation of cryptoassets and their markets
-Increased financial crime risk, and market risk

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