Scenario Analysis in Risk Management: Theory and Practice in Finance

171 Pages·2016·3.96 MB·English

by  Bertrand K. Hassani (auth.)

Bertrand K. Hassani
Scenario
Analysis in Risk
Management
Theory and Practice in Finance
Scenario Analysis in Risk Management
Bertrand K. Hassani
Scenario Analysis in Risk
Management
Theory and Practice in Finance
123
Dr.BertrandK.Hassani
GlobalHeadofResearchand
Innovation-RiskMethodology
GrupoSantander
Madrid,Spain
AssociateResearcher
UniversitéParis1PanthéonSorbonne
LabexReFi
Paris,France
Theopinions, ideas and approaches expressed or presented are those of theauthor and do
notnecessarilyreflectSantander’sposition.Asaresult,Santandercannotbeheldresponsible
forthem. Thevalues presented arejustillustrationsanddonot represent Santander losses,
exposuresorrisks.
ISBN978-3-319-25054-0 ISBN978-3-319-25056-4 (eBook)
DOI10.1007/978-3-319-25056-4
LibraryofCongressControlNumber:2016950567
©SpringerInternationalPublishingSwitzerland2016
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To mysunshines,Lila,Liam andJihane
To myparents,mybrother,myfamily,my
friendsand mycolleagueswithoutwhom I
wouldnotbewhere Iam
To Pr.Dr.DominiqueGuégan,who believed
inme...
Preface
Theobjectiveofthisbookistoshowthatscenarioanalysisinfinancialinstitutions
can be addressed in various ways depending on what we would like to achieve.
There is not one method better than the other; there are just methods more
appropriateinsomeparticularsituations.
I heard so many times opinionated people selecting a scenario strategy over
another because everyone was doing it; that is not the appropriate answer and
mayleadtoselectinganinappropriatemethodologyandconsequentlytounusable
results. Even worse, the managersmay lose faith in the process and tell everyone
thatscenarioanalysisforriskmanagementisuseless.
Therefore,inthisbook,Iampresentingvariousapproachestoperformscenario
analysis;some arerelyingonquantitativeapproaches;othersaremorequalitative,
butonceagain,noneofthem arebetterthananother.Eachofthemhassome pros
and cons and depends on the maturity of your risk framework, the type of risk
that banksare willing to assess and manage and the information available. I tried
to present them in the simplest way possible and to keep only the essence of the
methodologiesasinanycase;eventually,themanagerswillhavetofine-tunethem,
making them their own approach. I hope this book will inspire them. One of my
objectives was also to make supposedly complicated methodologiesaccessible to
anyriskmanagers.Indeed,thesewouldjustneedtohaveabasicunderstandingof
mathematics.
Note that I implemented all the methodologies I am presenting in this book,
and all the figures presented are my own. Most of them have been implemented
in professional environments to answer practical issues. Therefore, I am giving
some tools for risk managers to address scenario analysis, I am providing leads
for researchers to start proposing solutions to address them and I hope that the
clearperspectiveofcombiningthemethodologieswillleadtofutureacademicand
professionaldevelopments.
vii
viii Preface
As failures of risk management related to failures of scenario analysis pro-
grammes may have disastrous impacts, note that all the proceedings of this book
aregoingtocharitiestocontributetothereliefofsufferingpeople.
GlobalHeadofResearchandInnovation- BertrandK.Hassani
RiskMethodology
GrupoSantander
Madrid,Spain
AssociateResearcher
UniversitéParis1PanthéonSorbonne
LabexReFi
Paris,France
Biography
Bertrandisa risk measurementand managementspecialist(Credit, Market,Oper-
ational, Liquidity, Counterparty etc.) for SIFIs. He is also an active associate
researcheratParisPantheon-SorbonneUniversity.Hewroteseveralarticlesdealing
with Risk Measures, Risk Modelling, and Risk Management. He is still studying
to obtain the D.Sc. degree (French H.D.R.). He spent two years working in the
Bond/Structure notes market (Eurocorporate), four years in the banking industry
in a Risk Management/Modelling department (BPCE) and one year as a Senior
Risk Consultant(Aon-AGRCwithin Unicreditin Milan).He is currentlyworking
for Santander where he successively held the Head of Major Risk Management
position (San UK), the Head of Change and Consolidated Risk Management
position (San UK), the Global Head of Advanced and Alternative Analytics
position (Grupo Santander) and is now Global Head of Research and Innovations
(Grupo Santander) for the risk division. In this role, Bertrand aims at developing
novelapproachestomeasurerisk(financialandnon-financial)andintegratingthem
in the decision-making process of the bank (business orientated convoluted risk
ix
x Biography
management), relying on methodologies coming from the field of data science
(datamining,machinelearning,frequentiststatistics,A.I.,etc.).
Contents
1 Introduction................................................................. 1
1.1 IsthisWar? ........................................................... 1
1.2 ScenarioPlanning:Why,What,Where,How,When... ........... 2
1.3 ObjectivesandTypology............................................. 4
1.4 ScenarioPre-requirements........................................... 6
1.5 Scenarios,aLivingOrganism ....................................... 7
1.6 RiskCulture .......................................................... 8
References.................................................................... 10
2 Environment ................................................................ 11
2.1 TheRiskFramework................................................. 11
2.2 TheRiskTaxonomy:ABaseforStoryLines....................... 12
2.3 RiskInteractionsandContagion..................................... 14
2.4 TheRegulatoryFramework.......................................... 17
References.................................................................... 23
3 TheInformationSet:FeedingtheScenarios ............................ 25
3.1 CharacterisingNumericData........................................ 27
3.1.1 Moments.................................................... 28
3.1.2 Quantiles.................................................... 29
3.1.3 Dependencies............................................... 29
3.2 DataSciences......................................................... 30
3.2.1 DataMining................................................. 30
3.2.2 MachineLearningandArtificialIntelligence............. 32
3.2.3 CommonMethodologies................................... 34
References.................................................................... 36
4 TheConsensusApproach.................................................. 39
4.1 TheProcess........................................................... 40
4.2 InPractice ............................................................ 43
4.2.1 Pre-workshop............................................... 44
4.2.2 TheWorkshops ............................................. 45
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