Efficient Risk Management Research Articles

Effective and efficient model risk management

This paper considers the current challenges for banks to manage model risk, in the context of the triple pressures to reduce cost, to increase the quantity of models and model risk requirements, and to improve the quality of model risk management (MRM) activities. Despite the resource invested in the last decade, and the development of model risk as a risk discipline in its own right, there remain important dangers within MRM processes that can obscure or exacerbate the risk related to the use of models. We describe some of these dangers and the associated challenges to providing effective and efficient MRM. We also explore the steps that banks can take to improve MRM processes, moving from ‘standardisation’ to the ‘segmentation’ of MRM activities, allowing for a strategic deployment of cheaper off-shore resources and automation while retaining the all-important expert oversight.

A Consistent Approach for Probabilistic Residential Flood Loss Modeling in Europe

AbstractIn view of globally increasing flood losses, a significantly improved and more efficient flood risk management and adaptation policy are needed. One prerequisite is reliable risk assessments on the continental scale. Flood loss modeling and risk assessments for Europe are until now based on regional approaches using deterministic depth‐damage functions. Uncertainties associated with the risk estimation are hardly known. To reduce these shortcomings, we present a novel, consistent approach for probabilistic flood loss modeling for Europe, based on the upscaling of the Bayesian Network Flood Loss Estimation MOdel for the private sector, BN‐FLEMOps. The model is applied on the mesoscale in the whole of Europe and can be adapted to regional situations. BN‐FLEMOps is validated in three case studies in Italy, Austria, and Germany. The officially reported loss figures of the past flood events are within the 95% quantile range of the probabilistic loss estimation, for all three case studies. In the Italian, Austrian, and German case studies, the median loss estimate shows an overestimation by 28% (2.1 million euro) and 305% (5.8 million euro) and an underestimation by 43% (104 million euro), respectively. In two of the three case studies, the performance of the model improved, when updated with empirical damage data from the area of interest. This approach represents a step forward in European wide flood risk modeling, since it delivers consistent flood loss estimates and inherently provides uncertainty information. Further validation and tests with respect to adapting the model to different European regions are recommended.

Quantitative micro-scale flood risk assessment in a section of the Trotuș River, Romania

This paper focuses on the estimation of direct damages caused by three flood scenarios with different return periods in the section Făgetul de Sus – Ghimeş – Palanca Pass of Trotuș River, with the aim of highlighting the need of improved land use plans. The damage for three land use classes (residential building, infrastructure and agriculture) were estimated using the damage curves developed by the European Joint Research Centre (JRC) as well as site specific maximum damage values. The data were processed with the help of the ArcMap 10.2 software and FloodRisk tool from QGIS software. Furthermore, the flood risk was assessed using the damage – probability curves, which associates the damage with the corresponding frequency of occurrence. This method was identified and adapted to the characteristics of the study area in order to develop a methodology of flood risk assessment that is answering the question: does the lack of land use plans increase the vulnerability and the flood damage? The results showed that the greatest damages are registered for the residential building land use class for a flood probability of 0.001. In this case the damages reach up to 60% on the scale range of deterioration factor, the total damage value being 2 million euros. For the same hazard probability the total registered damage value for roads is 7500 euro, for railways is around 12,000 euro, while for agriculture is around 84,000 euro. These results highlight the need of protection measures and land use plans development and implementation. Regarding the protection measures we consider that the egalitarianism would be the concept that should be applied in the study area and also an improved cooperation between government, specialized agencies and local authorities at local level would lead to a more efficient flood risk management process. The proposed methodology can be applied for micro-scale analysis, providing quantitative results regarding the flood damage and flood risk assessment. It includes a detailed vulnerability analysis of the elements-at-risk with the aim of developing a more comprehensive approach of flood risk assessment.

Hybrid of Cuckoo Search Algorithm with Lévy Flight and Neural Network for Crude Oil Prices Prediction

Accurate prediction of crude oil price can successfully be used to deviate from the negative impact of the crude oil price hike. Limitations of previous studies prompt the proposal of an alternative approach for the hybridization of Cuckoo Search Algorithm with lévy flight and Back-propagation neural network (CSBP) for the estimation of crude oil price to enhance convergence speed accuracy. To evaluate the effectiveness of the proposed CSBP, we used ABC to train BP neural network (ABCNN) and Levenberg-Marquardt neural network (ABCLM) to develop an approach for crude oil price prediction. The outcomes of simulated comparative indicate that the proposed CSBP outperforms the ABCLM and ABCNN in both accuracy and convergence speed. Analysis of variance including post hoc multiple comparative test shows that the performance of the proposed CSBP is statistically significant than the comparison algorithms. The negative side of the crude oil prices in the global market can be defeated with proper planning based on the crude oil prices predicted by the CSBP. The CSBP proposed in this paper could provide a new strategy for risk managers and analysts to create an efficient risk management framework to formulate policies related to risk issues in the global crude oil market.

Financial Instruments to Support Russian Exporters

The subject of the research is the basic financial instruments for the support of Russian exporters that can ensure the competitiveness of Russian corporations in the international markets. The purpose of the article is a structured description of the line of banking products that are available for leading Russian exporters, as well as defining the tools for international development banks whose member is the Russian Federation; also, commercial banks products classification for exporters, and study of pre-export credit. The methodological base for the research is optimization approach application to the forming of the capital structure for the exporting corporation using financial tools. To analyze banking products, structural and process approaches, including describing the parameters and pre-export and post export financing mechanisms and detailed execution schedule of the transactions, are used. Three key elements of corporate capital raising are discriminated. They are optimal structuring of the deal, correct organization of the monetary fund’s raising process, and efficient risk management in raising debt and stock capital. It is concluded that exporters have to use a number of different banking products to raise capital for achieving tactical and strategic aims of development. Depending on the needed size, terms and structure of the transactions the corporation can use such tools as short-term revolving credit, medium-term investment credit, long-term project financing.

БАГАТОФАКТОРНІ МОДЕЛІ ІНДИКАТОРІВ РОЗВИТКУ КРИПТОВАЛЮТНОГО РИНКУ

Криптовалютний ринок розглянуто як складову фінансової системи, визначено індикатори його розвитку та досліджено зв’язки між ними. Індикаторними змінними використовувались вартість криптовалют щодо курсу долара США і щодо курсу біткоїна, обсяг торгів та капіталізація криптовалют. Серед індикаторних змінних для подальшого моделювання обрано вартість криптовалют. Побудовано багатофакторні регресійні моделі залежності вартості криптовалюти від двадцяти факторних змінних, що характеризують 423 криптовалюти. Проаналізовано прогнозувальні властивості двох остаточних моделей, що включали вісім і сім суттєвих факторних змінних, серед них: кількість уподобань на сторінках сервісу facebook, які стосуються криптовалюти; кількість співучасників у розробленні програмного коду, активність репозиторію програмного коду криптовалюти і кількість прийнятих змін; загальна кількість наявних і вирішених питань стосовно програмного коду криптовалюти; середня кількість користувачів онлайн-сервісу reddit, які наглядають за криптовалютою протягом останніх 48 годин, і середня кількість коментарів до відкритих тем, які стосуються криптовалюти. Друга модель була побудована без урахування домінуючого впливу Bitcoin та Ethereum. Зроблено висновки щодо можливості практичного використання моделей для фінансового аналізу і планування.

Embedding environment and sustainability into corporate financial decision‐making

AbstractThe business case for sustainability can be built upon: (i) cost reduction from efficient resource utilisation, (ii) revenue enhancement, (iii) risk management, and (iv) intangible assets. However, executives often adopt a short‐term perspective owing to executive compensation, investor pressure, and decision‐making criteria tied to fixed financial reporting systems. We propose an integrated conceptual framework, which highlights how firms could embed environment and sustainability into their long‐term financial decision‐making framework. To give this goal structure, the firm could adopt: (i) longer‐term executive compensation plans, (ii) longer‐term financial reporting, and (iii) flexible financial decision‐making models which embed intangibles.

The optimal multi-period hedging model of currency futures and options with exponential utility

In this paper, we consider the optimal cross-hedging and risk control problem of a competitive firm facing exchange risk exposure in a multi-period setting. We present the optimal positions of currency futures and options to maximize the exponential utility of the terminal wealth by dynamic programming approach. To evaluate the potential effectiveness of cross-hedging with currency futures and options, we compare terminal wealth, utility based on terminal wealth and variance of the wealth accumulation path in three cases: hedging with futures and options, net futures hedging and no hedging. An empirical study of two cross-exchange rates of USD/EUR and CNY/USD is performed. The results show that cross-exchange rate futures and options always offer the firm an improved ability to hedge against the foreign exchange rate risks. Relative to no hedging, cross-hedging with currency futures and options or net currency futures hedging achieves positive returns. As the risk aversion coefficient increases, the firm’s profit of futures hedging increases, while the profit of options hedging decreases. We suggest the firm with smaller risk aversion coefficient choose options hedging, and the firm with higher risk aversion coefficient choose futures hedging. Furthermore, when using currency derivatives for hedging, the wealth volatility also decreases significantly. Thus, for the multinational firms, cross-currency hedging is an efficient risk management technique to reduce their foreign exchange risk exposure.

Violence after discharge from forensic units in the safe pilot study: a prospective study with matched pair design.

ObjectiveThis paper reports on a prospective naturalistic study of violent recidivism after discharge from forensic mental health. Main aims were to find predictors of violence and to test the feasibility of a matched pair design for this purpose.MethodsPatients from the Safe pilot project (n=18) and a group of controls (n=18) were matched on 10 variables, such as diagnosis, seriousness of violence, setting after discharge, and risk management plans. All the Safe pilot patients had been through repeated measurement of dynamic risk factors of violence the year before discharge to develop efficient risk management plans for use after discharge. We wanted to test whether violent recidivism during follow-up would be lower and less serious in the Safe pilot group.ResultsWe found no significant between-group difference concerning number of patients with violent recidivism. However, the Safe pilot patients had significantly lower rates of violence and fewer severe violent episodes. In the control group, there was a significant association between a high number of risk management plans and high rates of violence. There was a statistical trend for the opposite association in the Safe pilot group.ConclusionWe discuss this in terms of a possible gap between the development and implementation of plans.

The impact of flood management policies on individual adaptation actions: Insights from a French case study

Floods can be managed at the collective and individual level. Knowing the interaction between measures taken at both scales can help design more efficient flood risk management policies. Here, we combine the data collected during a survey of 331 inhabitants of flood-prone areas in the South of France and spatial databases to empirically examine the interaction between individual adaptation measures and three types of collective management tools: a national insurance scheme, dikes, and zoning instruments. In line with the levee effect hypothesis, we found that dike protection reduces the probability to have or take individual adaptation measures and that this effect could be mitigated by zoning instruments. Moreover, we found that the national insurance scheme does not crowd out individual adaptation.

Historical Drought Assessment Over the Contiguous United States Using the Generalized Complementary Principle of Evapotranspiration

AbstractAs drought involves diverse natural and human‐made processes in hydrologic cycles, it is necessary to track a process‐specific variable for efficient drought risk management. In this study, we employed a state‐of‐the‐art formulation of the generalized complementary relationship (GCR) to estimate terrestrial evapotranspiration (ET). The GCR ET estimates were used to assess historical droughts over the contiguous United States (CONUS) in relation to long‐term natural fluctuations. Results showed that the GCR provided strong performance in reproducing water balance ET estimates and correlations to the El Niño–Southern Oscillation, when compared to observation‐driven estimates and land surface models. For 1982‐2011, the GCR yielded better performance than land surface models even with estimated radiation inputs and no wind speed variations. The Standardized Evapotranspiration Deficit Index (SEDI) based on the GCR provided a consistent drought assessment with precipitation‐based drought identification and remotely sensed vegetation conditions. The SEDI seems to capture the heat wave‐driven flash drought together with water deficit‐driven droughts. In the CONUS, the La Niña‐like conditions were likely to trigger extensive vegetation droughts with extreme severity. This study found the three long‐term environmental factors that affect the general trend of ET deficits over the CONUS, which are the Atlantic Multidecadal Oscillation, the mean air temperature, and the Pacific Decadal Oscillation. Especially, the Atlantic Oscillation seems to be the most significant predictor that could explain the long‐term variation of vegetation droughts over the CONUS. This study highlights that the GCR‐based SEDI could be useful for monitoring and assessment of drought risks at a continental scale.

The Management of Reputational Risks in Banks: Findings From Germany and Switzerland

This article identifies reputation-risk-relevant factors for banks, and the focus will be placed on the development of an indicator-based model for the assessment of reputation. Requirements and insights are based on a survey of credit institutions in Germany and Switzerland, which have been predominantly affected during the financial crisis by aptly nascent risks and which are thereby also partially affected even today. Reputation level can be considered as a temporally dynamical phenomenon which predominantly develops depending on the changes in the reputation drivers and expectations of the groups of stakeholders. This control parameter can be determined with the aid of Reputation Index Points (RIP). Efficient reputation risk management can, in the future, help prevent negative spillover effects from banks which face difficulties from the society or the taxpayers.

Major accidents in Norwegian fish farming

The Norwegian fish farming industry is experiencing accidents that may have serious consequences for fish-farm operators, the environment, and the farmed fish themselves. Fatalities and serious personnel injuries, mass mortality of fish during and after operations, introgression of genes from farmed salmon, the spread of disease and material damage to assets are among the consequences. The reputation of the industry and the market value of its products may also suffer as a result of such incidents. Other industries have developed regulations aimed at preventing incidents called major accidents, which are usually defined as accidents that have different characteristics than occupational accidents. A holistic and efficient risk management system needs to cover all types of incidents. In spite of serious accidents, regulators have yet to adopt a holistic approach to the prevention of major accidents in Norwegian aquaculture. Here, we describe and discuss five main risk dimensions in the aquaculture industry that provide a holistic view of the complex risk picture of fish farming; fish welfare, personnel safety, risk to the environment, economic loss and food safety. Hazards that emerge in the fish production process and in the local environment, have consequences both for the fish farm and for society as a whole. On the basis of characteristics drawn from definitions of major accident regulations in other industries and the risk dimensions of fish farming, we propose a general definition of major accidents. The definition is discussed based on the type of risks that occur in fish farming, and with an emphasis on accidents that have happened in the Norwegian aquaculture industry. The occurrence of major fish farming accidents shows that a systemic approach to safety and risk management is needed. Regulators and industry are already looking to the offshore petroleum industry in order to develop and adapt technology and risk management for aquaculture. Approaches to risk regulation in the two industries are discussed and some differences pointed out. Barrier management is one of the potentially holistic and systemic major risk management methods required in offshore regulation that is seen as a possible way forward for the fish farming industry, and we offer some reflections on adopting this method to fish farming.

Corporate Governance, Risk Management and Ethical Investment: Evidence From Banking Industries

Considering the importance of good corporate governance in the banking industry, the study has been designed to investigate the managerial perceptions on interrelationship among good corporate governance, risk management, and ethical investment of the commercial banks of Bangladesh. Bangladesh has been selected as a field of study for three reasons. Firstly, banking is the leading sector in Bangladesh. Secondly, banking sector has been highly criticized in the recent times due to Bangladesh Bank scandal. Thirdly, banking is gradually being challenging services in Bangladesh. As a financial intermediary, bank has to ensure good corporate governance for smooth operations and reducing agency problem. As a trustee, bank deals with the money of others through various schemes of investment. Ethical investment known as social responsible investment is an indicator of good corporate governance. A structured questionnaire has been used to gather perceptions of managers of the sample banks. The results suggest that the most important factors for effective CG were the board of directors, auditors and managers of the various departments. The study also finds that risk taking behavior of the bank is influenced by the direction of board of directors. In this study corporate governance variables have been categorized with some sub-indices. Board’s structure with independent directors and well communication with supervisors ensure the efficient risk management practices in the banks where internal audit system and transparent disclosures of the board ensure the ethical investment practices.

Multidimensional modelling of complex and strategic construction projects for a more effective risk management

Risk management is a growing concern in the field of construction management. Public–private partnership (PPP) procurement is recent and was introduced in France in 2004. This type of construction project is complex and may have a very long life-cycle, a complex organizational plan, contractual complexities, macro-environmental factors and a strategic importance. An objective, reliable and practical risk management process is essential for establishing an efficient risk management framework and reaching the project objectives. However, traditional methods are rather limited for managing the risks of complex construction projects. In this research study, a formalized and systematic multidimensional modelling of risk management process (MMRMP) is developed. This process aims to identify systematically the risk events, assess them, determine the critical risks and develop action plans in order to mitigate, eliminate or transfer the negative risk impacts. The MMRMP proposes a dynamic risk management approach in parallel with the project management through the project life-cycle, adapted to the evolving nature of the project. The model is developed based on the multi-dimensional analysis of several PPP projects in France, and in partnership with a major construction company to favour its use in real operation conditions. The process is primarily developed for PPP projects in general, but the model can be replicated in a specific type of complex and strategic construction project, and contractual frame. A user-friendly prototype interface has been developed to apply the process for real construction projects. How it works in practice is illustrated through a PPP project in France.

Flood Inundation Mapping of the Sparsely Gauged Large-Scale Brahmaputra Basin Using Remote Sensing Products

Sustainable water management is one of the important priorities set out in the Sustainable Development Goals (SDGs) of the United Nations, which calls for efficient use of natural resources. Efficient water management nowadays depends a lot upon simulation models. However, the availability of limited hydro-meteorological data together with limited data sharing practices prohibits simulation modelling and consequently efficient flood risk management of sparsely gauged basins. Advances in remote sensing has significantly contributed to carrying out hydrological studies in ungauged or sparsely gauged basins. In particular, the global datasets of remote sensing observations (e.g., rainfall, evaporation, temperature, land use, terrain, etc.) allow to develop hydrological and hydraulic models of sparsely gauged catchments. In this research, we have considered large scale hydrological and hydraulic modelling, using freely available global datasets, of the sparsely gauged trans-boundary Brahmaputra basin, which has an enormous potential in terms of agriculture, hydropower, water supplies and other utilities. A semi-distributed conceptual hydrological model was developed using HEC-HMS (Hydrologic Modelling System from Hydrologic Engineering Centre). Rainfall estimates from Tropical Rainfall Measuring Mission (TRMM) was compared with limited gauge data and used in the simulation. The Nash Sutcliffe coefficient of the model with the uncorrected rainfall data in calibration and validation were 0.75 and 0.61 respectively whereas the similar values with the corrected rainfall data were 0.81 and 0.74. The output of the hydrological model was used as a boundary condition and lateral inflow to the hydraulic model. Modelling results obtained using uncorrected and corrected remotely sensed products of rainfall were compared with the discharge values at the basin outlet (Bahadurabad) and with altimetry data from Jason-2 satellite. The simulated flood inundation maps of the lower part of the Brahmaputra basin showed reasonably good match in terms of the probability of detection, success ratio and critical success index. Overall, this study demonstrated that reliable and robust results can be obtained in both hydrological and hydraulic modelling using remote sensing data as the only input to large scale and sparsely gauged basins.

Multi-dimensional wind fragility functions for wood utility poles

Risk assessment and life cycle cost analysis of electric power systems facilitate analysis and efficient management of compound risks from wind hazards and asset deteriorations. Fragility functions are key components for these analyses as they provide the probability of failure of poles given the hazard intensity. Despite a number of efforts that analyzed the wind fragility of utility wood poles, impacts of key design variables on the likelihood of failure of poles have not been yet characterized. This paper, for the first time, provides a set of multi-dimensional fragility models that are functions of key factors including class, age, and height of poles, number and diameter of conductors, span length, and wind speed and direction. Unlike existing generic pole fragility models, this new class of fragility functions is able to accurately represent various configurations of power distribution systems. Therefore, it can reliably support decisions for installation of new or replacement of existing damaged or decayed poles. The generated fragility models are also used to investigate impacts of design variables. For example, results indicate that when height is considered as a covariate for the fragility function, the likelihood of failure of wood poles for a given height increases with class number. However, if height is treated as an uncertain variable, and therefore, excluded as a covariate from the fragility model, lower classes of poles may have higher failure probability as they are often used for higher clearance limits.

How to improve attribution of changes in drought and flood impacts

ABSTRACTFor the development of sustainable, efficient risk management strategies for the hydrological extremes of droughts and floods, it is essential to understand the temporal changes of impacts, and their respective causes and interactions. In particular, little is known about changes in vulnerability and their influence on drought and flood impacts. We present a fictitious dialogue between two experts, one in droughts and the other in floods, showing that the main obstacles to scientific advancement in this area are both a lack of data and a lack of commonly accepted approaches. The drought and flood experts “discuss” available data and methods and we suggest a complementary approach. This approach consists of collecting a large number of single or multiple paired-event case studies from catchments around the world, undertaking detailed analyses of changes in impacts and drivers, and carrying out a comparative analysis. The advantages of this approach are that it allows detailed context- and location-specific assessments based on the paired-event analyses, and reveals general, transferable conclusions based on the comparative analysis of various case studies. Additionally, it is quite flexible in terms of data and can accommodate differences between floods and droughts.

Resilience Engineering for Sustainable Prevention in the Manufacturing Sector: A Comparative Study of Two Methods of Risk Analysis

Manufacturing businesses today have become complex sociotechnical systems. They must manage a variety of risks, including those related to occupational health and safety and emergent ones. In this article, we examine the possibility of using resilience engineering to provide a framework for the management of OHS and emergent risks in manufacturing businesses. More specifically, we compare failure mode effect and criticality analysis (FMECA) to functional resonance analysis method (FRAM), the former being an established risk analysis method in the manufacturing sector and the latter being a relatively novel method used primarily in high-risk sectors such as air transportation, hospitals and railways. These two methods differ in several respects, but comparison reveals their relative advantages as well as their complementarity. Our principal finding confirms the advantages of the functional resonance analysis method in risk management for complex systems. Although failure mode effect and criticality analysis is more effective for understanding technical risks, functional resonance analysis method provides better understanding of the system as a whole and allows more efficient management of organizational risks as well as risks associated with the variability of human performance.

Premises for Efficient Climatic Risk Management in the Russian Agriculture: an Investment-Innovation

Premises for Efficient Climatic Risk Management in the Russian Agriculture: an Investment-Innovation