Perspectives on the risk function

What it is about

Miguel Yagüe, Senior Advisor at Boston Consulting Group, explained at the First Annual Risk Conference (September 2023) how a bank's risk function must evolve in the face of artificial intelligence, big data and digitalization, without neglecting solvency.

The 16 slides outline a risk function that balances three objectives (defense, strategy and growth), describe the changes in the credit risk value chain (data, analytics and processes with instant decisions) and propose four axes to secure future solvency. They close with the role of scenario analysis and risk appetite as strategic tools.

Objectives

• Describe the role of the risk function as a business partner, in addition to its defensive role.
• Explain how advanced analytics and automation change the credit decision process.
• Identify the axes that must be looked after so as not to compromise solvency in the new paradigm.

Key takeaways

1. The risk function of the future balances three objectives: defense (measuring and managing financial, non-financial and emerging risks), strategy (optimal use of resources) and growth (precise real-time credit decisions).
2. Artificial intelligence, big data and digitalization are a must for the risk function: advancing less implies adverse selection risk.
3. Four axes for solvency: develop traditional risks (such as interest rate risk), develop the new risks (ESG, fraud, cyber, digital processes, conduct, model risk), take a cross-cutting view and prevent a false sense of control.
4. Risk metrics have limits: even with high confidence levels, models do not capture infrequent or disruptive events well.
5. Scenario analysis and risk appetite must be integrated into strategic planning and management decisions to optimize the risk-return relationship.