Page 144 - Risk Management in current scenario

under the stressed condition would help identifying tail risks better. Such
assessment would also reduce capital, through release of capital kept
aside for catastrophe risk and through better location of risks.

The regulatory bodies round the world should start including the macro
risk analysis as a part of risk management process along with current
practice of micro risk analysis as shown in the picture. By doing this, it
will help regulators in spotting early trends as many of the micro level
risks germinates in the macro garden and follow a cascading effect.

This will give more confidence and increase credibility to the risk
management process in fighting against the collapse of another financial
disaster that may happen in future. As identified by World Economic
Forum, geopolitical and environmental risks are more important risks for
the future of this world compared to economic risk as thought today.

The initials signs of these risks are spottable even today through an erratic
pattern in the environment worldwide is .One may not be surprised if
the world witness the impact of extreme weather impacting the ability
to grow food (just an example) for the world; this may lead to food crisis
increasing inflation immediately affecting increase in interest rate; this
would further lead to fall in the stock market, reducing asset value and
creating mismatch between assets and liability.

Similarly, geopolitical risk is raising its head slowly in the current unipolar
world. It may happen that, the impact of interstate conflicts, failure of
national government and slow economic growth may give rise to long
lasting impact on the global economy and it may take years to recover.
If this happen financial system round the world will crumble together
taking away the confidence of the customers.

In such situation, even the national governments may not be able to bail
out financial institutions due to sheer size of losses. The focus here is to
widening the scope of risk management from current narrow focus.

142 | Risk Management in Current Scenario