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Welcome to the sixth edition of Risk Perspectives, a Moody’s Analytics publication created for risk professionals.

“The reports of my death have been greatly exaggerated,” famously quipped Mark Twain. I have been reminded of this quote recently as mainstream commentators talk of the demise of banking as we know it due to death by a thousand cuts from increased regulation in favor of more nimble Silicon Valley upstarts. Indeed, the impact of the continued low interest rate environment, combined with a range of new competitors and the effects of financial regulatory reform around the world, has created a perfect storm for traditional financial institutions. However, from the time the Florentine bankers developed the campagnia structure that introduced new forms of funding, such as time deposits and preferred equity-like structures, bankers have been innovating to provide essential services to society. In fact, one can argue that the effect of increased regulation is not only making the banking industry safer but also raising the cost for competitors to enter the market.

At our recent Risk Practitioners Conference, the focus of conversations was on extracting greater value from data, removing organizational barriers, and implementing technology-supported processes to improve capital allocation and enterprise risk management. The seeds sown by post-crisis regulatory drivers are giving rise to better risk management practices that will, in time, provide a competitive advantage. With this in mind, we are dedicating this edition of Risk Perspectives to the future of risk management. Risk Management: The Decade Ahead, looks at the best practices of today that will form the successful risk management practices of the future.

In the first section, Rethinking Risk Management, Dr. Christian Thun takes stock of the forces that are challenging the traditional banking model. Kevin Hadlock explores foundations of risk management culture through effective training programs. Brian Heale and Philip Allen look at the effect of new market entrants and consumer regulation on the distribution paradigm of the insurance industry.

In the second section, Regulatory Spotlight, María de la Concepción Cañamero updates the regulatory radar, a snapshot view of current and future regulatory initiatives by region and industry. Dr. Tony Hughes discuss the benefits and applications of industry data and models in the context of regulatory stress testing.

Next, the Approaches to Implementation section features an article on the implementation of a Risk Appetite Framework that considers a firm’s business strategies. Mehna Raissi and Grace Wang write about data visualization. Dr. Juan M. Licari, Dr. Gustavo Ordonez-Sanz, and Chiara Ventura explore dynamic simulation methods for retail credit portfolios. Then, Dr. Amnon Levy, Dr. Pierre Xu, and Dr. Jing Zhang discuss ways to manage credit risk when faced with regulatory capital requirements.

In the final section, Principles and Practices, Cayetano Gea-Carrasco and Andy Frepp examine how banks can prepare for disruptions in the business ecosystem driven by the financial technology (FinTech) revolution. Yuji Mizuno writes about macroeconomic shifts that will change financial risk profiles and how banks’ balance sheet management will become more complex due to regulations. Dr. Douglas W. Dwyer and Dr. Tony Hughes analyze the role of third-party data and analytics in the stress testing process.

I encourage you to take part in this conversation and help us shape future issues of Risk Perspectives by sharing your feedback and comments on the articles presented in this sixth edition.

Anna Krayn
Senior Director and Team Lead, Capital Planning and Stress Testing

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