Volume 18 (2025)

This paper proposes a robust quantitative method to measure the magnitude of differences in credit quality among multilateral lending institutions (MLIs). Leveraging multiple discriminant analysis (MDA) and principal component analysis (PCA), we transform ordinal credit rating scales, traditionally provided by international credit rating agencies (CRAs), into precise ratio-level measurements. The developed methodology directly addresses a critical limitation of ordinal rating systems — their inability to quantify exact differences between closely rated institutions. For risk managers, accurately quantifying such differences is crucial, as credit quality nuances significantly affect the pricing of derivatives, collateral agreements, the calculation of credit valuation adjustment (CVA)-related capital charges and, more broadly, the assessment of institutional capital requirements. In the absence of an objective and fundamentals-driven measure of credit quality differentials, risk managers are often compelled to rely on market-driven indicators — such as credit default swap (CDS) spreads or bond yields — which, while widely used, are inherently prone to volatility, short-term noise and potential distortion. Such reliance can lead to misinterpretation of underlying credit fundamentals, particularly in periods of market stress, where signals may be driven more by sentiment than by structural creditworthiness. Given the increasing adoption and strategic importance of credit risk transfer instruments by MLIs — mainly to enhance financial resilience, manage single name concentration risks and expand lending capacity — a rigorous methodology to address credit risk mismatches among participating institutions is essential. Furthermore, our methodology has broader implications beyond quantifying credit quality differentials. By providing a numerical representation of credit opinions, as conveyed through agency-assigned ratings, the framework offers insights into the behavioural patterns of rating agencies. For example, a larger numerical distance between classifications may signal a more conservative or deliberate approach to rating adjustments by a given agency. More broadly, the proposed framework has the potential to inform revisions to existing rating methodologies employed by the leading CRAs (eg S&P, Moody’s, Fitch). By more accurately capturing subtle differences in credit quality, it could contribute to enhanced transparency, comparability and accuracy in credit assessments. This article is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business/.
Keywords: credit rating differentials; multilateral development banks (MDBs); multiple discriminant analysis (MDA); principal component analysis (PCA); credit risk transfer instruments; quantitative credit assessment and rating agency methodologies

This paper investigates the challenges in implementing enterprise risk management (ERM) in the Indian insurance sector. This is the first such study within the Indian insurance market, which is essential for risk management professionals, policy makers and regulators to understand these gaps and work towards addressing them. The Government of India has recently opened the Indian insurance sector for 100 per cent foreign direct investment, and this paper will be helpful for new investors in the Indian market. The research adopts a semi-structured interview-based approach to address the research problem under investigation. The respondents are primarily senior risk professionals in the Indian insurance industry. The paper identifies an inadequate understanding of the roles and responsibilities of the first and second line of defence. There are challenges in the quantification of non-financial risk as well as the availability of data for this purpose. There is inadequate risk training and a lack of standard risk language among the insurance companies. The authors recommend (based on the results of this paper) that the regulator and the Board of Insurance Companies should work together to address these gaps and make the Indian insurance sector more robust and resilient to manage future emerging risks. This article is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business/.
Keywords: risk management; enterprise risk management; Indian insurance industry; Chief Risk Officer; risk culture; risk champion; risk identification; risk training; risk education

The adoption of Capital Requirements Regulation (CRR) III in 2024 introduced a new regulatory architecture for credit valuation adjustment (CVA), requiring financial institutions to align capital buffers with evolving counterparty credit risk. This paper provides a comparative analysis of the standardised (SA-CVA), basic (BA-CVA) and simplified (SI-CVA) approaches, incorporating detailed numerical examples and explicit mapping to CRR III provisions. By tracing BA-CVA’s theoretical lineage to the Capital Asset Pricing Model (CAPM) and Modern Portfolio Theory (MPT), the study connects supervisory regulation with foundational financial theory. The findings highlight that while SA-CVA offers risk sensitivity and potential capital relief, BA-CVA and SI-CVA serve as accessible but conservative alternatives for less complex institutions. A dual-layered CVA strategy combining Pillar 1 minimums with internal Pillar 2 overlays is recommended to manage residual risks and wrong-way exposures effectively. This article is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business/.
Keywords: credit valuation adjustment (CVA); CRR III; SA-CVA; BA-CVA; SI-CVA; Pillar 2; counterparty credit risk; wrong-way risk (WWR); capital asset pricing model (CAPM)

Conventional country-risk models consolidate many threats into a single score, often overlooking the way political, economic and security pressures interact. This paper offers an alternative: the indicator-based peril framework. It separates exposure into ten clear perils, such as non-payment, currency inconvertibility and contract alteration, and tracks each one with a focused set of public data and expert insight. The methodology supports real-time scoring, escalation logic and institutional alignment, addressing forecasting failures observed in legacy models. Results are expressed on a five-level scale that shows where risk is low, rising or acute. A close examination of Egypt’s 2023–24 financial crisis reveals how the approach highlights warning signs that standard ratings overlooked. By explaining which peril is worsening and why, the framework enables decision makers across sectors to act more promptly and tailor responses to their own risk priorities. This article is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business/.
Keywords: country risk; peril-based scoring; early-warning model; sovereign exposure; indicator weighting; expert overlay; forecasting

A stable banking sector is an essential part of the modern-day economy and higher credit risk is a major source of bank instability. Therefore, many research studies have been conducted to identify the determinants of credit risk in the past three decades. The purpose of this paper is to conduct a systematic literature review of the prior studies on the determinants of credit risk published from 1988 to 2022 in peer-reviewed journals. The motivations of this study are to draw a more comprehensive conceptual framework of credit risk determinants, evaluate the policy responses to recent banking crises and propose future research avenues. The findings of 452 relevant prior studies are divided into three broad categories of credit risk determinants. The three broad categories are macro, bank-specific and sector-specific variables which are then divided into six sub-categories and further divided into 43 credit risk determinations. The results reveal that more specific, multidiscipline and multicounty research studies may help to further understand this topic to improve stability in the banking sector. This article is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business/.
Keywords: banking sector; credit risk; non-performing loans; determinants; literature review

This paper provides perspective on the transformative opportunities and risks from FinTech innovations actively reshaping the financial landscape. It aims to offer a balanced view of how these advancements can drive positive change while addressing the challenges they may present. For example, these innovations significantly enhance service levels through various methodologies and technologies; however, they also introduce considerable risks that must be addressed. The paper begins by outlining the FinTech industry’s defining characteristics, followed by examining its associated risks and opportunities. Additionally, the paper explores the unique aspects of selected FinTech companies, offering insights into their operational models and strategies. It also reviews the regulatory frameworks governing these enterprises to illuminate their legal and compliance challenges. Key considerations for potential investors are also provided, emphasising the importance of understanding the unique risks and rewards. The paper concludes that the outlook for FinTech is optimistic, presenting substantial transformative potential; however, effectively navigating the complexities in the evolving FinTech industry requires collaboration among all stakeholders, including entrepreneurs, regulators, investors, financial institutions and consumers. Such collaboration is essential for leveraging the advantages of FinTech while addressing the potential risks associated with its rapid development. This paper is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business/.
Keywords: FinTech; features; risks; regulation; FinTech risk; operational risk; business risk; strategic risk; reputation risk

This paper examines the complex field of risk management in the FinTech industry, highlighting the need for robust methods to mitigate inherent risks and leverage new technologies. FinTech presents various operational and regulatory challenges that call for thorough management to support stability and growth as it continues to upend established financial paradigms. We examine the high failure rates in innovative endeavours, emphasising the significance of strategic financial planning and entrepreneurial agility for long-term viability. The potential for operational hazards to compromise financial integrity and trust is closely examined, with a focus on cyber security, business continuity and intellectual property protection. The paper also discusses the evolving regulatory frameworks that have a significant impact on the development and implementation of new financial technologies. We evaluate how these rules affect the preservation of competitive advantages, the defence of consumer rights, and the overall stability of the economic system. Additionally, the report examines market dynamics that affect liquidity and investment strategies, which are essential to FinTech’s long-term viability and profitability. This study employs a combination of qualitative observations and case studies to describe the most effective risk management techniques for safeguarding FinTech businesses against common mistakes. These techniques help ensure their long-term viability and establish new standards in the financial sector. The main objective is to provide stakeholders, including investors, business owners and legislators, with a clearer understanding of operating ethically and profitably in the FinTech sector. This article is also included in The Business & Management Collection, which can be accessed at https://hstalks.com/business/.
Keywords: risk management; FinTech; regulatory challenges; banking; innovation; cyber security; embedded lending; BaaS

The development of tech companies in financial services, while paving the way for innovation, may raise new forms of risk. First, by focusing on specific parts of the value chain or specific products which are in general less regulated, the development of such companies may result in increased fragmentation and complexity while preventing comprehensive supervision on their financial activities under current regulation. Secondly, the emergence of digital platforms as interfaces for accessing financial services may also result in new forms of distribution and dependencies for ‘distributed institutions’, which may in turn make the entire financial system more vulnerable. The aim of this paper is to explore the risks for financial stability related to the development of tech companies in financial services and assess whether the current regulatory framework is adequate to address the potential risks. Against this background and considering the diversity of business models, the paper outlines the different features of a possible European Union (EU) regulatory strategy that aims to balance the financial stability imperative and innovation according to three main options: (1) enhancing supervisory capacity to monitor the development of non-banks’ financial activities; (2) strengthening sectoral regulations where tech companies are likely to develop (eg non-bank lending, payments) to enable harmonised and consolidated supervision; and (3) imposing, when reaching a certain significance, the grouping of financial activities in a dedicated holding structure and implementing group supervision on such structure. This article is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business/.
Keywords: big techs; financial stability; financial regulation; mixed-activities groups; financial innovation; financial supervision; digital finance

New technologies, changing customer needs and regulations have reshaped the traditional playing field for banks and other financial services providers. Embedded finance is an example of this. Embedded finance is the seamless integration of financial services into non-financial platforms (eg e-commerce). As a result, customers no longer need to leave the platform to fulfil their financial needs, such as paying or borrowing. This offers customers greater convenience and efficiency. Banks and other traditional financial services providers are increasingly being pushed back into the value chain, unless they compete with these platforms by becoming more innovative, entering into strategic collaboration with technology partners and building embedded financial platforms themselves. In both cases, from a supervisory perspective, they are ultimately responsible for the risks of these ecosystems. This paper analyses the background of embedded finance, the unbundling of the value chain of traditional financial service providers and the emergence of new ecosystems. The benefits of embedded finance for customers, however, entail risks arising from the increasing complexity of the new ecosystems. If the mutual responsibilities of all parties involved are not clearly defined, the risk of market failure increases. It may also be unclear whom the customer should contact in the event of a problem or incident with the service provided by the platform. The authors advocate a form of organised cooperation, which also has proven itself in existing payment schemes. This includes common standards, uniform agreements and transparency with respect to the terms and conditions of the provided services. This will not only reduce costs for all the parties involved, but also increase trust among consumers and businesses using these services. This article is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business/
Keywords: banking-as-a-platform; banking-as-a-service; buy now pay later; data sharing; embedded finance; FinTech; market failure; open finance; platforms

This paper examines the role of algorithmic auditing as a mechanism for responsible AI development and deployment in the financial sector, with a particular focus on Singapore’s regulatory and institutional initiatives. Against the backdrop of fragmented global artificial intelligence (AI) governance frameworks, the study analyses how Singapore has developed operational tools — such as the Veritas Toolkit, AI Verify, Project Moonshot and Project Mindforge — that go beyond abstract ethical principles to provide measurable, use-case-specific standards for auditing AI systems. These initiatives contribute to standardising audit practices, enhancing transparency and bridging trust gaps between financial institutions, regulators and stakeholders. The paper finds that Singapore’s model is notable for its regulator-led, collaborative approach and its focus on sectoral applicability, particularly in high-risk areas such as credit scoring and fraud detection. It also identifies key limitations: the voluntary nature of these frameworks, the challenges of replicability in larger or more fragmented jurisdictions and the lack of universally accepted standards for algorithmic auditing. Moreover, the study highlights the need to broaden auditing efforts to include organisational and human factors, recognising that the use and interpretation of AI outputs are equally critical in managing risk. Ultimately, the paper offers insights into how Singapore’s experience can inform the development of scalable, enforceable and effective algorithmic auditing frameworks in global financial services. This article is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business/.
Keywords: AI audits; artificial intelligence; FinTech; financial regulation; AI governance

This paper provides insights on the link between operational risk management, disaster recovery (DR), business continuity planning (BCP), outsourcing and operational resilience, for financial services. Core of the analysis of this paper is examining the use of stress and scenario testing for operational risks, focusing on the UK insurance sector as a case study. Specifically, it presents a critical analysis on the application of this risk management tool in risk and crisis management, from a resilience lens. The aim of this practical paper is to highlight the relationship between DR, BCP, third party risk management (TPRM) and operational resilience from a scenario analysis angle and testing requirements. This comparison of existing regulatory prescribed stress tests supports the recommendations for the development of company-specific severe but plausible scenarios. Guidance on the development, design, assessment and quantification of idiosyncratic scenarios is presented, building on the lessons learned from the regulatory prescribed stress tests. Overall, this research highlights the application of scenario analysis and stress testing as a core element of risk management practices for UK insurance companies in meeting operational resilience requirements, while enhancing their DR, BCP, TPRM and their overall approach in managing operational risks. Insights on advances in scenario analysis and stress testing for cyber risks and operational resilience are sought, considering the developments around FinTech and providing practical guidance for their implementation. This article is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business.
Keywords: risk management; scenario analysis; operational resilience; disaster recovery; business continuity planning

Crypto as an asset class has historically presented a variety of both opportunities and challenges for financial institutions. The meteoric rise in the value of digital assets — from non-existent to nearly US$4tr in total, in less than 20 years — underscores the massive potential for economic upside associated with exposure to cryptoassets, whether directly or indirectly. Conversely, the digital asset markets have historically experienced extreme swings in value, including downturns, that significantly outpace those of numerous other asset classes. This dynamic poses serious issues for risk managers working in financial institutions that have direct or indirect exposure to cryptoassets and crypto markets (or that are considering taking on such exposure). Meanwhile, different jurisdictions around the world have adopted a variety of legislative, regulatory, self-regulatory and judicial approaches to imposing top-down, across-the-board, legally mandated risk management. The US has historically been viewed as legally and politically more restrictive, and even punitive, relative to a number of other jurisdictions. This reality (or perception has, in turn, prompted a variety of cryptoasset developers and investors, as well as financial institutions with economic or commercial interests therein, to prefer centres of gravity in non-US jurisdictions. But recent US political developments may signal a shift in that landscape, in turn, presenting risk managers with greater optionality in terms of structuring, monitoring and managing economic and commercial relationships with cryptoasset developers and investors. Against that backdrop, this paper provides a retrospective overview of competing regulatory frameworks in numerous jurisdictions around the world; observes how inter-jurisdictional regulatory arbitrage strategies — especially from the standpoint of US versus non-US centres of gravity — may be morphing based on recent trends; and provides some practical insights for risk managers seeking to evaluate cryptoassets and/or crypto projects based on a variety of factors, including jurisdiction-specific considerations. This article is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business/.
Keywords: crypto assets; risk management; regulation; virtual asset service providers; FinTech; financial institutions

The financial services industry is facing unprecedented challenges from rapid technological advancements, evolving customer expectations and emerging risks such as those posed by autonomous agents, the Metaverse and quantum computing. Traditional risk management frameworks, while robust, are primarily informed by the meaningful insights and lessons of past trends, events and compliance, leaving organisations vulnerable to emerging and hard-to-decipher threats. The authors propose a paradigm shift in risk management by introducing the concept of ‘innovation as the fourth line of defence’. This approach recognises the crucial role of innovation professionals in proactively identifying, assessing and mitigating emerging strategic risks. By collaborating closely with the first, second and third lines of defence, innovation teams can bridge the gap between current practices and future needs, ensuring long-term resilience. The analysis highlights the interconnectedness of innovation and risk management, particularly in a rapidly changing world. It emphasises the need for a proactive and forward-looking approach to risk mitigation, where innovation teams act as strategic enablers. The study also identifies key areas where innovation will be crucial in addressing emerging risks, such as the rise of autonomous agents, the Metaverse economy and the advent of quantum computing. The authors argue that innovation is not just about developing new products and services but also about safeguarding the future of organisations. By embracing innovation as the fourth line of defence, financial institutions can navigate the complexities of a hyper-changing world, ensuring their long-term sustainability and success. The wider implication is a call for closer collaboration between innovators, risk managers, supervisors and regulators to create a more resilient and future-proof financial ecosystem. This article is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business/.
Keywords: risk management; innovation; financial services; climate change; cybercrime; autonomous agents; resilience

Since the global financial crisis of 2007/08, policymakers and market participants alike have paid more attention to financial stability risks, alongside a more longstanding focus on macroeconomic developments. While the emphasis on such risks is welcome, however, it can often be focused solely on specific concerns or issues; there has been relatively little attempt to assess different financial stability risks relative to one another. This opinion piece proposes a simple approach for doing so, based on the building blocks of classical credit analysis. It describes and illustrates a new way of presenting different financial stability risks relative to one another, which would enhance the analysis of both risk managers and policymakers alike.
Keywords: financial stability; systemic risk; relative rank assessment

Over the course of the last three decades, arguably, operational risk’s most important characteristic has been its sensitivity to economic shocks, making it correlated with both credit and market risk losses. Outside of periods of economic stress it is decidedly idiosyncratic. This sensitivity is underpinned by very complex interactions between rapid and significant changes in economic metrics and human behaviours. Consequently, while stress testing operational risk is clearly important, it remains challenging for companies and regulators alike. In order to address this problem, this paper analyses historical loss data to demonstrate that economic shocks may variously influence the occurrence of operational risk events, trigger the detection of both historical and on-going events, and exacerbate the severity of any resulting losses. This leads to a variety of inherent challenges for quantifying this economic sensitivity, including the difficulties of predicting how the behaviours of different stakeholders may change, and also of assessing the detection of previously unknown issues. Additionally, existing Pillar 1 and 2A capital requirements may already reflect operational risk losses suffered during previous economic shocks, as there is no recognised methodology for excluding operational risk losses that are sensitive to economic shocks from a bank’s minimum capital requirements. There are a range of differing approaches to stress testing propounded by the Bank of England (BoE)/the Prudential Regulation Authority (PRA), the European Banking Authority (EBA) and the US Federal Reserve, which variously address these challenges. This paper concludes that there is no magic bullet, and hence it proposes that companies triangulate between a portfolio of approaches, including qualitative and quantitative assessments, stressed modelled losses, and the EBA’s floor calculations. It also suggests that the balance between minimum capital requirements and loss-absorbing buffers should be fundamentally shifted to reflect how operational risk actually behaves, to address the current double counting of stresses within Pillar 1 and 2A capital requirements, and to make operational risk capital more useable by banks. Finally, a significant part of the value of the stress testing process arises from companies identifying their vulnerabilities and determining the mitigating actions that need to be taken at the outset and during an economic shock.
Keywords: operational risk; stress testing; scenario analysis; real options

The banking industry is inherently exposed to interest rate risk, which arises from the mismatch between the interest rate sensitivities of assets and liabilities. This mismatch can lead to significant fluctuations in a bank’s net interest income (NII) and economic value of equity (EVE) when interest rates change. In recent years, dynamic deposit behaviours have emerged as a significant factor influencing interest rate risk in the banking book (IRRBB). Conventional asset liability management (ALM) models often overlook the evolving nature of deposit betas, product mixes and decay rates, resulting in suboptimal risk assessments. This paper advocates for integrating dynamic modelling approaches while acknowledging the importance of sensitivity analysis to bridge the gap between static and dynamic frameworks. By embedding these techniques into ALM practices, banks can improve IRRBB management, effectively balancing complexity and simplicity while better addressing depositor behaviour in fluctuating interest rate environments.
Keywords: deposit modelling; sensitivity analysis; interest rate risk in the banking book (IRRBB); deposit betas; net interest income (NII); economic value of equity (EVE); asset liability management (ALM)

Predicting major turning points in the market has often been dismissed as a fool’s errand, and yet, there is no shortage of practitioners or researchers attempting to do so. This paper offers such an attempt, as it examines intraday market dynamics during significant reversals using skewness, kurtosis and the Hurst exponent as primary variables of interest. The paper analyses minute-by-minute data of the S&P 500 (SPX) and NASDAQ 100 (NDX), with the goal of identifying patterns that precede market peaks and troughs. Focusing on specific periods during the COVID-19 pandemic and the great financial crisis (GFC), the findings of this study reveal that during market tops, skewness becomes more negative, kurtosis increases and the Hurst exponent is trending upwards. The exact opposite trends were observed just before a market bottom. These results provide valuable insights and a good analysis framework to better understand market dynamics at a high-frequency level. The paper also proposes numerous extensions for further research to transform these observations into actionable strategies for investors as well as risk managers.
Keywords: market reversals; risk management; risk models; high-frequency data

In the realm of credit risk assessment, the utilisation of artificial intelligence (AI) and machine learning (ML) classification models has become increasingly prevalent. This paper thoroughly investigates latest advancements in AI/ML classification models for credit risk assessment, which are crucial for assessing the creditworthiness of individuals and businesses. Key findings reveal that modern AI/ML techniques, particularly Random Forest and XGBoost, outperform traditional logistic regression methods. Additionally, interpretability techniques, including Shapley Additive exPlanations (SHAP) and feature importance analysis, improve the understanding and transparency of model predictions. This paper synthesises recent research findings and industry developments to provide practitioners and researchers with insights into model selection, evaluation metrics and explanation techniques, thereby contributing to the ongoing evolution of credit risk management strategies in the financial sector.
Keywords: credit risk assessment; artificial intelligence; machine learning

Long-term development finance provided by multilateral development banks (MDBs) is key to advancing the United Nations’ Sustainable Development Goals (UN SDGs). MDBs are, however, constrained by the availability of capital. Risk transfer can shift risk from their balance sheets to expand lending. This paper explains how ground-breaking securitisation transactions have been used by MDBs and argues that, while there are challenges, this technique has significant potential to increase development lending.
Keywords: risk transfer; international financial architecture; G20; multilateral development banks; securitisation; rating agencies; preferred creditor treatment; development

Since the conception of operational risk management and the need for regulators to calculate and require adequate levels of capital, this discipline has developed and matured, supported by an ever-growing amount of data, techniques and taxonomies. This paper seeks to escape from the complex technical aspects of the discipline for just a moment, and to refocus on the human factors and their limitations when designing and applying an operational risk management framework in the first place. Consequently, this is a personal and perhaps somewhat philosophical view on how an operational risk management framework could be infused with a more explicit and uniquely human perspective, to embed the technical aspects of the discipline in a broader sense of purpose and meaning. More than merely pondering, the paper concludes with some initial recommendations on how to follow through and to apply the consequences of these thoughts onto an operational risk management framework.
Keywords: operational risk; operational risk management; operational risk management framework; oversight; governance; decision hygiene; humanities; philosophy

Financial institutions have always been tasked with mitigating risks due to their role in financial markets. Risk management is a fundamental component of financial intermediation, which since the late 1970s has become more structured, demanding more sophisticated tools and techniques and requiring Chief Risk Officers (CRO) to possess advanced technical skills, particularly in the hard sciences. Nevertheless, technical skills are not the sole expertise required nowadays; the participation of risk managers in strategic meetings calls for negotiation skills to interact with those responsible for drafting the business plan, typically the Chief Financial Officer (CFO), and communication skills to connect with board members who set the strategic direction. While negotiation can be mediated through the General Manager (GM) or the Chief Executive Officer (CEO), communication with the board is direct and immediate. Traditionally, effective communication is not generally regarded as a typical quality of financial risk managers, since this is a substantially different skill from the technical expertise needed. Regulators require that banks implement company-wide risk management frameworks with the use of analytical models for the measurement and control of quantifiable risks. In addition, corporate governance guidelines advocate for the ‘business partner’ role in risk management. The question is: how do risk officers balance their dual role as a ‘compliance champion’ and a ‘business partner’? Effective communication may provide a solution. This paper outlines the goals and tools for effective communication for risk management to enable sound decision making and thereby counteract the group thinking that may lead to poor decisions, often resulting in an imbalance between risk taking and control that can undermine the operational resilience of banks.
Keywords: Chief Risk Officer; corporate governance; effective communication; group thinking; reporting; risk culture; soft skill

This paper provides an in-depth discussion on the challenging task of transition that financial institutions (FIs) face in the context of key regulatory, market and competitive dynamics. In response to the necessary transition to a low-greenhouse gas (GHG) economy, FIs will need to adjust their business model and strategy to ensure future viability. Consequently, they need to change their asset mix from brown industries to green industries and direct their financing towards green activities and companies with favourable environmental, social and governance (ESG scores). They will need to do this in an orderly fashion, striking the right balance between future readiness and remaining sufficiently competitive and profitable along the way. To do that they need transition tools that allow them to steer their portfolio mix and activities towards the future low carbon economy, enable them to get paid for the ESG risks they take and ensure that they remain in control so that they can adjust and correct their lending mix as needed. In this paper, a transition tool that incorporates ESG risk into pricing is discussed. The proposed three-layer framework incorporates industry and loan purpose effects, as well as borrowers’ ESG scores as an idiosyncratic element. The calibration of the tool is explained using numerical examples.
Keywords: environmental risk; pricing; transition risk; ESG; green financing; banking capital and funding

Climate change is forever changing the risk environment for insurers and their customers. A recent example of this is the intense storm witnessed by the people of Bahrain and around the region on the eve of 16th April, 2024. There were minimal preparations made by either insurers or their customers, resulting in severe disruptions to daily life and property damage. To mitigate this, insurers need risk management programmes that move beyond traditional solutions to deal with climate change. These risk management solutions must be varied to cover all aspects of an insurance operation and provide customer value. Solutions can be focused on changing policy cover terms, new product development, altered investment strategies, use of technology and innovation, and engagement with the public. There are challenges, however, such as the availability and credibility of data, affordability and social equity, uncertain regulations and rising costs. Yet, the consequences of not acting on climate change will be higher for insurers eventually.
Keywords: climate change; weather events; disasters; storm; insurance; risk management; property damage

Anthropogenic global warming and climate change-related risks are facts. While physical risk (which can cause damage and losses) and transition risks (due to disorderly policies and transition pathways) are generally understood, new types of risk for financial institutions are emerging in banking supervision and in so-called climate change litigation. An example of the former is the new ‘risk from misalignment’ of banks with European Union (EU) climate objectives, as recently discussed by the European Central Bank (ECB). This risk is caused by the requirement to align with EU climate change goals, which may not be compatible with the path a financial institution in a market economy might choose to adopt during the transition to cleaner energy. The second development is driven by climate activists suing banks in ‘strategic litigations’ based on the concept of ‘duty of care’, which may not require causality as a legal precondition. While these developments can be debated, they are likely to be the ‘new normal’ for financial institutions. It is proposed that these new types of climate change-related legal risks can be managed through a four-step mitigation approach as an iterative process of awareness, monitoring, active mitigation and observing emerging trends.
Keywords: climate change-related legal risks; strategic litigation; alignment to objectives; causality; transition plans; mitigation approach

Cyber security continues to be an issue for organisations, particularly those that collect and use personal information. The implementation of a robust risk assessment and detailed control framework which is focused on addressing key threats is critical to achieving cyber resilience. Some organisations are keen to espouse their cyber security credentials, often in an effort to satisfy regulators, assure stakeholders and placate consumers. Regardless of this rhetoric, however, some of these organisations still suffer from a cyberattack. What does it mean when these words are not put into practice?
Keywords: cyber washing; cyber; risk management; incident response; cyber resilience; regulation

This paper studies countries’ economic dependence on China through trade. As China’s importance in the world economy has grown significantly in recent years, developments in China will increasingly be reflected in its trading partners’ economic performance. Therefore, measuring and identifying countries’ economic exposure to China has become increasingly relevant. Responding to the need by risk management practitioners in financial institutions, the paper builds a tool to measure and compare countries’ exposure to the Chinese economy through trade channels, using principal component analysis. The resultant China Trade Exposure Index ranks countries based on their economic dependence on trade with China. The utilisation possibilities of the index are broad, yet the most obvious application is in financial institutions’ stress testing exercises. Indeed, the index can be used in a China-specific stress testing scenario to transmit a shock to other countries according to their China dependence. To validate the relevance of the index, the paper further shows that the China Trade Exposure Index is significant in explaining countries’ cyclical economic growth co-movement with China, with a higher ranking implying a stronger real gross domestic product (GDP) growth correlation. Therefore, the China Trade Exposure Index helps global investors, risk professionals and policymakers in analysing potential China-related country risks.
Keywords: trade exposure; economic dependence; principal component analysis; risk management; stress testing