Third Phase of Risk Control Evolution
This paper observes current developments in the financial industry from risk control viewpoint, that is through the lens of internal audit or other similar corporate governance functions. The period of roughly last fifty years may be divided into three broad phases of incremental development. Each phase presented their own risks that needed corresponding control measures to mitigate the risk. The first phase was marked by growth in derivative and securitization products and concurrent growth in financial models to value and analyze the products. Control focus was on managing the innovation in risk-controlled manner. Much of the effort went into understanding the intricacies of the products and of models in order to implement requisite controls. The second phase started after 2007-09 Global Financial Crisis. Following heavy losses that culminated into the crisis, the industry focus was on sound balance sheet and risk management. The regulators issued various regulations and guidance to improve capital position, liquidity profile and risk management practices. From control perspective, the focus was to assess that the firms meet the regulations both in letter and spirit, and at the same time underlying processes are sound, i.e., right data, suitable models, etc. The technology developments include emergence of alt-data, development of machine learning models and emergence of digital currencies. For alt-data, the challenge is to get proper understanding of the meaning of data and assess its suitability to the problem we are trying to solve. As for machine learning, the models learn to achieve defined objectives through data provided by the user. Hence requisite involvement of business expertise is important in defining the objectives and in assessing the adequacy of training data. For digital currencies, like any other asset class, we need to understand specific characteristics of the product in order to appropriately price and risk manage the digital currency related products. Socio-political developments include growing awareness of climate change risk, growing consciousness of environment, social and governance (ESG) issues, and changing landscape of globalization. These developments are likely to manifest themselves over long term and their trajectories highly depends on human actions. Hence from control viewpoint, one needs to have perspective of risks under different potential scenarios. Also, considering that the impact of a firm’s activities on climate change risk and ESG issues may extend into deeper fabric of society, appropriate disclosures are important as well
Year of publication: |
[2023]
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Authors: | Srivastava, Udayan |
Publisher: |
[S.l.] : SSRN |
Saved in:
freely available
Extent: | 1 Online-Ressource (13 p) |
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Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments July 09, 2023 erstellt |
Other identifiers: | 10.2139/ssrn.4504989 [DOI] |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10014353313
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