Wings , Stress Testing & the CEO

A story 📖

Imagine you have a new idea. It could be great – some sort of innovation, or new project type, something that the client could be doing differently.

You think it’s great, but are aware that many colleagues are looking at the same data and situation and didn’t spot it. Perhaps it is not a great idea?

What if you missed something? Do they know something that you do not? Or what if you are asked to deliver the innovation, but do not have all the necessary inputs and resources? It could backfire. Should you mention it to your boss? Or better not?

Let’s assume you do go into that conversation. With a boss, colleague, mentor, or a peer. You explain what you think could be changed.

• They nod. So far, so good. At least they didn’t laugh. They are thinking it over.

• They open their mouth and say the first sentence.  And they say…

<< spoiler alert! We will give you two options here>>

Option 1, they say:

“Let me play the devil’s advocate..”

You nod and start defending your idea from different angles. You were half expecting this while building up the courage to speak up. You mulled it over already, but there may be other obstacles to address.

Option 2, they say:

“How can I help?”

You play the words again in your head. And spread your wings.. what could you do, if you had more people supporting you? Could it be bigger and better still? Could it be brought to life?

There is a prevailing perception that coming with an innovative idea to the Risk team is going to be met with a blank ‘no’. That risk management, in reality means risk aversion and lack of flexibility.

Though they may be perceived as business blockers, risk managers are not meant to have that role. There is an important role that risk teams have to play with each innovation – from understanding the idea, through looking at the implications and figuring out the best way to manage risk associated with it.

💡It takes both the right experience, attitude and tools to be able to do this.

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Let’s take the concept of stress testing🔍. In its purest form – it is a way of putting extra pressure on the system and seeing what happens. The ‘regulatory’ stress testing is one way of doing so, but moving away from regulatory stress testing to more ‘rapid stress testing’ and scenario analysis could be a good way to help navigate the current circumstances.

☕It’s Monday morning. Country A just announced that it will not immediately apply tariffs on Country B and will not allow delivery of cheap goods packages. Country B provided a list of products and services that it would apply the retaliatory tariffs on, and a trade war ensues.

You come to the office and the question from the boss is:

🗨️ if they go ahead, what does it mean for our credit portfolio in terms of ratings and valuation? Could you quickly tell me, even indicatively?

❓You scratch your head.

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You close your eyes and remember a tool you’ve heard about recently which could help you answer this question, quickly and accurately: as a user, you start by selecting a relevant set of economists and analysts from a pre-approved list of cross-sector experts, select the countries in question, and your industries or companies. You can even ask it to generate an impact and comment on its likelihood level.

Once you’ve picked all the parameters, the tool magically (read: Gen AI instead of magic) reads through all the reports and insights that meet the brief, and summarises the findings, grouping them where appropriate and even identifying key futuristic trends. 

Naturally, you’re cynical of this sort of sorcery so you review them, to sense check – this is easy enough, as they are written in plain English. The tool outlines how tariffs will affect the particular industries you selected, what it could mean for other macroeconomic factors like interest rates, currencies and sector performance. There are multiple layers of impact, and you are thankful for the technology, as it processes all the scenarios and reports generated by multiple experts.

At the end, you’ve got three potential scenarios with low, medium and high impact ratings and probabilities against these.🎯

You approve the three scenarios, and the inputs move to the rapid stress testing tool. The current version still does analysis only by sector or country, but you know that a more detailed one is about to be launched which would allow you to analyse the performance of individual companies – separating them by country or region. This distinction would be helpful, given the geopolitical risks and analysis of impact of newly levied tariffs that are now core to your role. Knowing which countries the companies operate in, would allow you to separate the most impacted players and the ones shielded from disruption. Now THAT will be a gamechanger.🌟

Ok, the results are back

 You look at the forecasted balance sheet, P&L and capital requirements. There is one sector with forecasted impact numbers that seems to be impacted irrespective of the scenario. That is very interesting… you may need to dig deeper to understand that and check your exposure there.

☕But first things first, a coffee and a quick update for the CEO.

With the right tools, attitude and engagement – risk management could be the most exciting team to belong to. And arguably, it would also mean we would need to step up our game and play our role in the best possible way. No hiding behind excuses like “it’s not prescribed by the regulators” or “my job is just to tick the boxes”. As risk professionals we have always strived to be closer business decision making, and given the overall macro environment and technological developments, it is our chance to grab opportunities to make that difference.

 As we start 2025, in many organisations the focus will be very much on innovation, getting to a new level of growth or capability. This will often be linked to new ways of doing things, new partnerships and new technology, accelerators or applications.

It’s for us--the leaders--to set the tone of these "Could I bounce an idea off you" conversations. With just a few words, we can make a big difference. As I discovered, when many years ago my very tough boss chose option 2 in our conversation.

I can still recall the stress melting away, and the unbelievable feeling of ‘everything is possible’.