Risk Management

This research presents findings from two studies conducted by the Universities of Cranfield and Sheffield, which investigated two complimentary, but unrelated, areas of research – manufacturing cladistics, an evolutionary classification scheme from the biological sciences, and evolutionary systems modelling, from the physical sciences. Using this new evolutionary framework, designed to model through simulation the evolution of manufacturing form, new structural organizations were explored. A second study is presented that explores the diversity of management decision-making and the potential consequences on the evolution of manufacturing form. This research compares and contrasts the different opinions of decision-makers. The results, in terms of the evolutionary trajectories that the firm may take, provide interesting insights into the consequences of decision-making of different managers that inevitably base their decisions on different information, values and beliefs. The aim of this and related research is to develop a user-friendly decision-support tool for management.

The current study delves into the post-loss financing options MG Rover (MGR) could have used, in addition to the UK government bridging loan, before its collapse in 2005. An examination of the pre-bankruptcy state of MGR was carried out, and it confirms the existence of high security holder agency costs arising from debt overhang and adverse selection problems. In addition, the findings show that due to steep private information costs and negative trend in earnings, the use of equity, debt, government loans and contingent financing as post-loss funding vehicles was not an optimal financial decision in markets where capital is rationed. In this case, the existence of both trade debt and legacy costs made it difficult for potential investors to assess the full value of MGR's assets, before debt retirement. Issuing low priced risky securities would have imposed a net loss on existing securities and made them unattractive to investors. A conclusion reached is that the only way of addressing post-loss risk financing problems at MGR was either through issuing securities whose value was least sensitive to revelation of ultimate information or through bankruptcy which is what they rightly did.

Worldwide, recent corporate financial scandals have raised many questions in terms of risk management and governance of banks. This study examines the impact of risk management-related corporate governance mechanisms on bank performance. Focusing on a sample of large banks, we want to assess the effect of the board of directors and risk management committee features as well as the presence of a Chief Risk Officer (CRO) in the executive board on performance over the period 2006–2017. To examine this relation properly, we employ the system-GMM (Generalized Method of Moments). Results show the importance of the risk management committee in enhancing bank performance. We also find that the presence of a CRO in the bank’s executive board decreases performance and that the lower the number of meetings, women, and independent members, the better the banks’ performance. Most importantly, results show that establishing risk governance will make banks more profitable and sustainable for the future.

In this paper, we provide a systematic review of the growing body of literature exploring the issues related to pervasive effects of cybersecurity risk on the financial system. As the cybersecurity risk has appeared as a significant threat to the financial sector, researchers and analysts are trying to understand this problem from different perspectives. There are plenty of documents providing conceptual discussions, technical analysis, and survey results, but empirical studies based on real data are yet limited. Besides, the international and national regulatory bodies suggest guidelines to help banks and financial institutions managing cyber risk exposure. In this paper, we synthesize relevant articles and policy documents on cybersecurity risk, focusing on the dimensions detrimental to the banking system’s vulnerability. Finally, we propose five new research avenues for consideration that may enhance our knowledge of cybersecurity risk and help practitioners develop a better cyber risk management framework.

Monte Carlo simulation is a useful technique for modeling and analyzing real-world systems and situations. This paper is a conceptual paper that explores the applications of Monte Carlo simulation for managing project risks and uncertainties. The benefits of Monte Carlo simulation are using quantified data, allowing project managers to better justify and communicate their arguments when senior management is pushing for unrealistic project expectations. Proper risk management education, training, and advancements in computing technology combined with Monte Carlo simulation software allow project managers to implement the method easily. In the field of project management, Monte Carlo simulation can quantify the effects of risk and uncertainty in project schedules and budgets, giving the project manager a statistical indicator of project performance such as target project completion date and budget.

This paper looks at past risk management models and incorporates parts of those models into a new paradigm. This new refined paradigm can be viewed as a cyclical system containing five steps, with each step having three stages. The model is new in that each of the steps—program development, risk analysis, solution analysis, decision process, and system administration—are geared toward helping the organization achieve its goals. In addition, the new model is designed to involve all stakeholders. The risk management paradigm is a comprehensive and logical management method. It also has a flexible structure that allows it to adapt to future innovations in the risk management discipline.

There is a vast amount of literature criticizing the Basel Committee approach to the credit risk regulation, more specifically, the Internal Ratings-Based (IRB), as an excessively conservative one. However, the novelty of the current paper is that we identify when the IRB approach is too lax, i.e., we are able to present cases with the material credit risk underestimation. We show that the portfolio default rate (DR) depends on two parameters: probability of default (PD) and default correlation. Inversely, we offer a reproducible approach on how to derive the default correlation from historical data. Then it also depends on two parameters: PD and the historical DR variance. However, the IRB approach previewed only PD (and asset class) as the correlation determinants, neglecting the second contributor (DR variance). Hence, we demonstrate that when the actual DR variance exceeds the mean DR value, IRB may result in the credit risk underestimation. The almost two-fold underestimation is found for the credit cards (qualified revolving retail loans) asset class. The paper offers a practical solution how to adjust the revealed credit risk underestimation. The macroprudential add-ons to IRB risk-weights might be a workable solution format. Opinions expressed in the paper are solely those of the author and may not necessarily reflect the official position of the affiliated institution. Bank of Russia neither assumes any responsibility for the publication.

Some US regulators perceive that there are problems with the risk management process currently practised in the country. They are concerned that it is inherently legalistic, economically inefficient, and time-consuming (eg Kagan, 1991). These issues have been exacerbated by increasing public distrust toward policy makers and other opinion formers. Negotiated rule-making has been proposed by some academics and regulators as a possible way of resolving these problems of the regulatory process. This paper examines a case study of the negotiated rule-making approach utilised by the International Paper Company in re-licensing four hydropower dams in Maine. Although the approach in this instance was time-consuming, it was not adversarial and it led to increased public and stakeholder trust toward the company.