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Featured Column: FRM Corner

Market

Preventing the Next Bank Failure: Lessons Learned from the Fall of Republic First

The regional bank crisis in the U.S. is far from being over. Last month, Republic First Bank was seized by Pennsylvania regulators, and Federal Reserve Chair Jerome Powell expects to see more banks...

May 24, 2024 | By Alla Gil

Credit

The Budget Brain-Teaser: How to Optimize Capital

Financial institutions annually go through a budget allocation process, with business heads competing for capital and other resources. They give their projections on how much capital they need and...

April 19, 2024 | By Alla Gil

Credit

Stress Testing in 2024: Analyzing the Fed’s Newly Released Scenarios

Spurred in part by last year’s regional bank failures, the Federal Reserve has added two exploratory scenarios to the 2024 CCAR stress test. These scenarios cover issues like bank deposits, funding...

March 1, 2024 | By Alla Gil

Market

Siri, What's My Stress Scenario?

Starting with the pandemic and running through last year’s regional banking crisis in the U.S., a series of extreme, highly unpredictable events placed the spotlight on risk management...

January 19, 2024 | By Alla Gil

Culture & Governance

Redefining Financial Stability: Pros and Cons of New Regulatory Proposals

In the wake of recent bank failures, many long-standing notions about what constitutes safety and soundness in the financial industry have come under intense scrutiny. The failure of existing...

November 22, 2023 | By Alla Gil

Market

Balanced Risk Modeling: How to Better Prepare for Shocks

How helpful are existing models in identifying and preempting hidden risks? That’s an important question that has arisen in the aftermath of a stream of unexpected risk shocks over the past few...

September 29, 2023 | By Alla Gil

Credit

Exhaustive Scenario Analysis: What Banks Can Learn From the Airline Industry’s Flight Simulations

Extreme tail-risk events cannot be predicted, as demonstrated by the many unforeseen, rare or unprecedented events that have occurred over recent years. However, it is possible to prepare for their...

August 25, 2023 | By Alla Gil

Culture & Governance

How to Improve Risk Oversight at Banks: A Three-Step Checklist

As regulators, academics and financial institutions themselves seek answers about recent bank failures, and pontificate on management’s inefficiency in assessing risks in banks' balance sheets, the...

June 30, 2023 | By Alla Gil

Credit

Stress Testing and Scenario Analysis: The Customization Challenge

What’s the best approach for assessing a bank’s capital and liquidity adequacy? Moreover, what tools can we use to more accurately forecast tail risk, and do traditional stress tests still have...

April 28, 2023 | By Alla Gil

Market

Risk Management Lessons Learned From SVB

Less than a month before its historic collapse, Silicon Valley Bank (SVB) was named one of America’s best banks by Forbes. It just shows how quickly financial markets can change, particularly when...

March 17, 2023 | By Alla Gil

Market

Managing Liquidity Risk and Funding Costs During a Crisis

During economic crises, liquidity risk can spread throughout the financial system, leading to credit crunches and severe downturns. Banks must therefore that have adequate liquidity and funding to...

February 24, 2023 | By Alla Gil

Credit

How to Model Forward-Looking Credit Risk

The problems with credit loss-projection methodologies that rely on historical data have been illuminated over the past three years. Regression-based credit risk models have, indeed, been failing,...

January 27, 2023 | By Alla Gil

Market

Pension-Fund Risk: How to Improve Liquidity Management

The U.K. pension fund crisis raised significant concerns about the liquidity risk management strategies currently being employed by buy-side institutions. Specifically, it called into question...

December 9, 2022 | By Alla Gil

Market

Stress Testing Integration: How to Combine Capital and Liquidity

The failure to adequately model interrelations between capital and liquidity needs could lead to a dramatic underestimation of an institution’s vulnerability. This is particularly true in the current...

October 21, 2022 | By Alla Gil

Credit

Calculating the Capital Buffer in Volatile Times: How Much is Enough?

The amount of capital that is needed for an institution to be resilient through the rough times, while remaining competitive, is one of the key issues being discussed by the risk community today....

September 30, 2022 | By Alla Gil

Operational

Strategic Risk: How to Select Critical Future Scenarios

Amid the pandemic, inflation, the oil crisis, and the ongoing geopolitical risk of the past two years, there has been a lot of fair criticism of both backward-looking and forward-looking approaches...

August 19, 2022 | By Alla Gil

Market

Wealth Management: Is It Too Late for Early Warnings?

The typical advice from wealth managers or financial planners during a downturn is, “Don’t worry, the markets will recover, and we have a long-term strategy.” That is true: they will recover...

July 29, 2022 | By Alla Gil

Market

The Stagflation Challenge: How to Future-Proof Liquidity Risk

Cash is king. This may be a cliché, but it also happens to be true. If your balance sheet is bulging with greenbacks, it’s almost impossible to default. By contrast, you can have capital buffers in...

June 24, 2022 | By Alla Gil

Market

How to Manage Balance-Sheet Risk in Volatile Times

If the wind changes, you’ll stay like that! When I was a tot, I’d make silly faces, and my parents sometimes tried to persuade me to stop by teasing that my face would remain in an unflattering...

May 27, 2022 | By Alla Gil

Technology

The Next Frontier in Risk Management: How to Achieve Digitalization

The digitalization of businesses has the potential to unlock new opportunities for increased profitability and reduced risk. However, to reap the rewards of this transition, firms need to take a...

April 29, 2022 | By Alla Gil

Culture & Governance

IERM: How to Build a True Risk-Business Partnership

Some of us dream of Olympic glory. Others, of making it big by backing the next meme stock before it goes to the moon. For the past three decades or so, financial and corporate strategy teams have...

March 18, 2022 | By Alla Gil

Market

Strategic Asset Allocation: Analyzing Risk to Drive Return

Long-term investors typically use strategic asset allocation (SAA) to help them determine how to split investments among different asset classes. But traditional SAA often fails to consider both...

February 18, 2022 | By Alla Gil

Market

Risk vs. Return: How to Weigh the Pros and Cons of Alternative Investments

From fine art to cryptocurrencies, alternative investments are all the rage these days. Asset managers, insurance companies and pension funds are looking to alternative investments to boost returns,...

January 21, 2022 | By Alla Gil

Market

The Uncertainty of Inflation Risk

Fears of inflation have been rising. Indeed, persistent inflation and monetary tightening is now the most cited potential market shock, according to the Federal’s Reserve’s most recent financial...

November 19, 2021 | By Alla Gil

Technology

The Alternative Data Craze: Peering Behind the Curtain

Amid the pandemic, traditional data has failed to provide the timely insights required for drastically-changing behavioral patterns. That's one of the reasons why alternative data has seen...

October 22, 2021 | By Alla Gil

Credit

How Effective are Your Scenarios?

Financial institutions need scenarios to measure future risks and returns, as well as to understand how to prepare for whatever comes their way. Given the latest regulations and accounting rules...

September 24, 2021 | By Alla Gil

Market

What’s Missing in Asset and Liability Management?

Financial institutions rely on asset and liability management (ALM) to mitigate the risks associated with mismatched assets and liabilities. However, traditional ALM frameworks are narrowly focused,...

August 26, 2021 | By Alla Gil

Credit

How to Stress Test for Extremely Unexpected Scenarios

In the financial services community, surprises aren't to everyone's taste. Sometimes, like the pandemic and the lockdowns it caused, they're nasty. Sometimes, like the rapid market recovery prompted...

July 23, 2021 | By Alla Gil

Technology

How to Mine Synthetic Data: Pros and Cons of a Shiny New Tool for Risk Managers

In a post-pandemic world where historical data has been so clearly found wanting, it should come as no surprise that synthetic data approaches are sprouting like mushrooms after a rainstorm. In the...

June 18, 2021 | By Alla Gil

Technology

Risk Drivers and Revenue Forecasting: A Brave New World

Every investor who's ever read the small print knows that past performance doesn't indicate future performance. Today, in a world in which the relationship between established drivers and revenue has...

May 21, 2021 | By Alla Gil

Operational

Risk Management in a Sea of Unknown Unknowns: The Complex Quest for Resilience

Traditional risk management methodologies have failed during the pandemic, prompting financial institutions to work diligently to improve their agility, resilience and adaptability. But in an era of...

April 23, 2021 | By Alla Gil

Credit

How to Prepare for Future Crises: A Multi-Scenario Approach to Tail Risk

“The future is not set,” said Kyle Reese, the hero in The Terminator movie. That, believe it or not, may turn out to be the most valuable lesson COVID-19 has taught the risk community and business...

March 26, 2021 | By Alla Gil

Credit

Credit-Loss Forecasting: A Practical Guide to CECL Implementation in Uncertain Times

Now more than ever, with COVID-19 rendering historical data mostly irrelevant for loss forecasting, estimation of expected credit losses must be forward looking. This presents significant challenges...

February 26, 2021 | By Alla Gil

Credit

Cyborg Model Validation

COVID-19 has yielded a crisis of confidence in models employed by financial institutions. Too many proved over-reliant on historical data in a year of unprecedented circumstances, and even...

January 22, 2021 | By Alla Gil

Credit

Putting Stress Tests in the Blender

In September, to further test bank balance sheets for stress, the Federal Reserve took the unprecedented step of releasing a second set of 2020 scenarios for its Comprehensive Capital Analysis and...

October 23, 2020 | By Alla Gil

Credit

Credit Risk Management in a Pandemic Era

In today's Covid-19 world - plagued by high unemployment, historic debt and soaring bankruptcies - a return to basics for loan and credit review has never been more important. Severe credit risks are...

August 28, 2020 | By Thomas Day

Credit

COVID-19 Contagion: Why Risk Managers Need a More Aggressive Approach to Economic Recovery

One of the most important attributes of a good risk manager is the ability to see what others do not see: to be able to peer around corners, search for the unexpected and act as ballast for new ideas...

May 29, 2020 | By Thomas Day

Credit

COVID-19: Emerging Credit Risk Challenges for Main Street Business Lending

As a result of the current economic crisis, banks, pensions, insurance companies, funds and other institutional investors and investment managers are at the early stage of a massive increase in...

May 1, 2020 | By Thomas Day

Culture & Governance

How to Improve Culture, Governance and Accountability: Proactive and Practical Actions

[Editor's Note: We would like to welcome Thomas Day, the co-owner and vice-chairman of ShortFin Capital Management and TBA LLC, as our new FRM Corner columnist. Thomas has a wealth of financial...

March 6, 2020 | By Thomas Day

Operational

The History of Risk Management: 30 Centuries of Innovation

Fascinating events have radically altered the course of financial risk management for the past 3,000 years - starting with Homer's definition of value back in the 8th century B.C. and moving all the...

March 22, 2019 | By Marco Folpmers

Operational

The Best Tool for Operational Risk Management

If you want to learn from the operational risk mistakes of others and prevent incidents that could severely impact your firm's reputation and bottom line, then case studies are your best bet. An...

February 22, 2019 | By Marco Folpmers

Market

Market Risk: The Road Ahead

For many years, financial institutions have had a difficult time figuring where, exactly, their financial instruments should be allocated. Whether an instrument should be accounted for in the trading...

January 31, 2019 | By Marco Folpmers

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