Volume 16 (2023)

Each volume of Journal of Risk Management in Financial Institutions consists of four quarterly 100-page issues. Articles scheduled for Volume 16 will be available to view on the 'Forthcoming content' page soon. 

The papers and case studies included in Volume 16 are listed below:

Volume 16 Number 1

  • Editorial
    Eduardo Canabarro, Independent Financial Economist
  • Opinion/Comment
    Determining environmental and social risk rating in a multilateral development bank
    Cristiane Ronza, Lead Specialist of Environmental and Social Risk Management and Stefanie Brackmann, Lead Specialist of Environmental and Social Risk Management, Inter-American Development Bank

    The Inter-American Development Bank (IDB) is committed to managing environmental and social risks in all banking operations. To meet this commitment, the IDB applies a risk-based approach to environmental and social management for project development and execution to prioritise its interventions. The purpose of this paper is to describe the key concepts involved in determining the environmental and social risk rating of IDB operations and its value to the bank’s overall risk management framework.
    Keywords: environmental and social risk management, impact assessment, ESG risk management, ESG portfolio management, ESG integration, engagement, environmental and social policy

  • Practice papers
    Should investors rely on central bank asset purchases to backstop markets?
    Colin Ellis, Professor of Finance, Hult International Business School

    During the global financial crisis, central banks in advanced economies cut policy rates to near zero, and then provided further stimulus via balance sheet expansion. In many instances this took the form of quantitative easing — central banks creating new money with which to purchase securities. With years of quantitative easing behind us, and aggressive measures from central banks during the COVID-19 pandemic, should investors now expect central banks to backstop financial markets? This paper examines asset purchases from the twin perspectives of monetary and financial stability, and argues that investors should not expect central banks to always come to their rescue.
    Keywords: central banks; quantitative easing; financial stability; moral hazard

  • Failure of strategic risk management in a life insurance company in India
    Sonjai Kumar, Certified Risk Management Professional, IRM and Purnima Rao, Associate Professor, Fortune Institute of International Business

    This paper discusses the importance of strategic risk management in avoiding an adverse effect on performance in the life insurance sector if long-term risks are ignored. The case considered here is the rise and subsequent fall of a life insurance company in India. The company initiated the sales and distribution of products in collaboration with banks (Bancassurance) but ignored the market momentum of the emerging distribution trend and did not change its distribution strategy. As a result, the company, which played a pioneering role in establishing the Bancassurance model, is now performing poorly, being at the bottom of the ladder on new business premium income.
    Keywords: strategy; risk management; strategic risk management; life insurance; Bancassurance; sales and distribution

  • Research papers
    What can we learn about repurchase programmes and systemic risk? Evidence from US banks during financial turmoil
    Foued Hamouda, Assistant Professor, Higher Institute of Management of Tunis GEF2A-Lab, and Higher Institute of Management of Gabès

    This paper contributes to the debate on systemic risk by measuring and comparing systemic risk and interconnectedness when banks repurchase shares during financial turmoil. It assesses the extent to which buyback programmes within banks contribute to systemic risk, relying on several measures of systemic risk and connectedness in a sample of 112 US banks during both a tranquil and an unstable period. Empirical results reveal remarkable increases in systemic risk in repurchasing banks compared to non-repurchasing banks and they are more exposed to it in difficult periods such as the European debt crisis and COVID-19. Banks that repurchased shares strengthened indirect links during systemic events and are potentially riskier. The results also classify and rank banks in terms of systemic risk involvement and connectedness and contribute to the identification of systematically important banks.
    Keywords: financial crisis; systemic risk; bank networks; interconnectedness; buyback programmes; COVID-19

  • A coherent economic framework to model correlations between PD, LGD and EaD, and its applications in EaD modelling and IFRS-9
    Peter Miu, Professor of Finance, DeGroote School of Business, McMaster University and Bogie Ozdemir, Co-Founder, RiskVision

    This paper proposes an economic framework recognising EaD as a stochastic variable and capturing the PD–LGD, PD–EaD and LGD–EaD correlations. It explains how these correlations can be estimated from historical data, and how PD, LGD and EaD can then be simulated in determining credit VaR. The framework allows credit losses to be more accurately captured, both in terms of the expected credit losses (ECL under IFRS-9 and CECL) and the unexpected tail events in measuring Credit VaR. The framework quantifies the potential underestimation of the tail risk in Credit VaR and the IFRS-9 ECL if the full correlation structure is not captured. By explicitly modelling EaD in a correlated fashion with PD and LGD, lenders can understand and model the increase in funding requirements during downturns. Application in back-testing IFRS-9 ECL is discussed and supplemented by a numerical example.
    Keywords: ESG; risk management; climate risk; credit risk; liquidity risk; operational risk; regulatory risk

  • Assessing risks in international investments using hesitant fuzzy linguistic term sets
    Ayfer Basar, Visiting Lecturer, Özyeğin University

    The world economy, global markets and competition for international investments have undergone great change in recent years. Changes in the economy of a society affect many countries as a result of international commerce and agreements with other countries. This has given rise to many risks that governments have to deal with; hence, the importance of risk management has increased for all countries, especially in the finance sector. Global economics means that financial institutions need to make decisions about investment in other countries (eg opening a new bank branch or a participation company), so they need to measure the financial risks of candidate countries in fuzzy conditions. This study presents a novel method to meet that need. First, the most common financial risks are determined by means of a literature survey and consulting expert opinion. Secondly, the relative weight of each main and sub-risk is determined by expert opinion and hesitant fuzzy linguistic term sets (HFLTS). These weights are used to measure the financial risks of 30 countries to select the best four and the results are approved by the experts. Finally, the proposed method is implemented to aid the investment decision of a large financial institution. This paper proposes a new method to assess financial risks in fuzzy conditions.
    Keywords: financial institutions; investment decisions; risk management; hesitant fuzzy linguistic term sets; case study