Risk Management Final Project 1

New Era University
College of Business Administration

Major in Financial Management
No. 9 Central Avenue, New Era, Quezon City, 1107 Philippines
COLLEGE OF BUSINESS ADMINISTRATION

DEPARTMENT OF FINANCIAL MANAGEMENT
RISK MANAGEMENT
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IN PARTIAL FULFILLMENT OF THE REQUIREMENTS OF

RISK MANAGEMENT FME 04-18 3FM2 Thursday 10:00am-1:00pm
FOR THE DEGREE OF BACHELOR OF SCIENCE IN BUSINESS ADMINISTRATION
MAJOR IN FINANCIAL MANAGEMENT (BSBA - FM)
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RISK MANAGEMENT FINAL PROJECT
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SUBMITTED BY:
Ms. NORILYN BRUN

Ms. CHARLENE CANCINO
Mr. CARL CONSIGO
Ms. LEANAH JOYCE CUBACUB
Ms. ERIKA DELOYA
Ms. MARIEL DAMMAY
SUBMITTED TO:
Professor Daisy Aileen E. Bandonillo
DBA, MBA, FRIBA,CSSYB
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TABLE OF CONTENTS
Introduction 3
Program Summary 9
Risk Management Strategy And Process 11
Responsible/ Executing Organization 18
Risk Management Process And Procedures 22
Risk Identification 24
Risk Assessments Metrics 27
Risk Analysis 29
Risk Mitigation Planning 32
Risk Mitigation Implementation 33
Risk Tracking 35
Appendices 38
Transcript 38
Documentation 45
Curriculum Vitae 46
References 47
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Introduction
Risk managers provide organizations with advice on any potential threats to the success,
security, or very life of the business. Mr. Enrico Patiga Villanueva worked as a Chief Risk
Officer where the chief risk officer (CRO) is the corporate leader entrusted with identifying and
minimizing significant financial, legal, and technology risks to an organization. Sometimes the
title "chief risk management officer" or "risk management officer" is used to refer to the role. In
general, CROs are interested in matters like insurance, IT security, financial auditing, internal
auditing, global business variables, fraud prevention, and other internal company investigations.
The innovations that Mr. Enrico Patiga Villanueva suggests are to improve credit models,
use analytics data, and machine learning to market new products. Credit Model is a mathematical
model that is used to calculate the likelihood that a client may default, or cause a credit event
(such as bankruptcy, obligation default, failure to pay, or cross-default events). Typically, a credit
score is used in a credit scoring model to represent the likelihood of default. Lower default odds
are indicated by a higher score. An institution's risk-adjusted return can be increased with the aid
of precise and predictive credit scoring models. Markets and consumer behavior, however, can
shift quickly during economic cycles, such as recessions or expansions. Dexterous model
development, modification, and validation skills are so essential for risk managers and credit
analysts. The main advantage of having credit scoring models for consumers is speed, which is
one of the benefits of this credit model. Lenders have the ability to impartially and quickly assess
thousands of applications. Mortgage, auto, and extended credit card limit decisions can be made
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in hours or even minutes. Credit scores enable financial organizations manage the risk and cost
allocation to their clients while also enabling consumers to get personal loans. When companies
have access to objective information for assessing a customer's creditworthiness, they can better
conduct transactions with clients.
Data analytics is the study of examining unprocessed data to draw inferences about that
data. Numerous methods and procedures used in data analytics have been mechanized into
mechanical procedures and algorithms that operate on raw data for human consumption. Data
analytics methods can highlight measurements and trends that would otherwise be buried in the
sea of data. A business or system's total efficiency can then be raised by using this information to
optimize processes. An organization can benefit from data analytics in a variety of ways, such as
by tailoring a marketing message to a specific client or by recognizing and reducing business
risks. Here are five advantages of data analytics that you should know about. The first benefit is
that to personalize the customer experience where businesses get client information through a
variety of methods, including social networking, online shopping, and traditional retail.
Businesses can learn about the behavior of their customers and deliver a more individualized
experience by employing data analytics to build thorough customer profiles from this data.
Second is to inform business decision-making, data analytics can be used by businesses to
inform decision-making and reduce losses. Prescriptive analytics can recommend what should
happen in reaction to changes to the business, and predictive analytics can suggest how the firm
should respond to these changes. Third, is to streamline operations where through data analytics,
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businesses may increase operational effectiveness. Data regarding the supply chain can be
gathered and analyzed to identify production bottlenecks and delays as well as to predict
potential future issues. An organization could augment or replace this vendor to prevent
production delays if a demand projection indicates that they won't be able to handle the volume
needed for the holiday season. Fourth is to mitigate risks and handle setbacks, In business, risks
are prevalent. They consist of customer or employee theft, unpaid invoices, worker safety, and
legal liabilities. Data analytics can assist a company in identifying hazards and implementing
preventative actions. For instance, a retail chain could use a propensity model, a statistical tool
that forecasts future behavior or occurrences, to identify the outlets most susceptible to theft. The
company might then use this information to decide if it should sell any locations or how much
protection is required at the stores. Last is to enhance security where threats to data security exist
for all firms. By analyzing and visualizing pertinent data, organizations can employ data
analytics to determine the root causes of previous data breaches. For instance, the IT division can
employ data analytics programs to analyze, analyze, and visualize audit logs in order to pinpoint
an attack's path and point of origin. IT can use this information to find vulnerabilities and patch
them.
Machine learning is a potent digital marketing technique that makes use of data analysis
to forecast consumer behavior and enhance marketing initiatives. It is a form of artificial
intelligence that makes it possible for computer programs to develop and learn on their own
without being explicitly programmed. In order to gather insights, spot patterns, and make
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predictions in digital marketing, machine learning analyzes enormous amounts of data. There are
other advantages from which we can learn, such as marketing automation, where marketers want
correct data in order to make data-driven judgments. However, it has grown more difficult to
manually sift and analyze the vast amounts of data that marketers have access to nowadays. This
is an area where machine learning can be useful. Second, marketing analytics, which allows
businesses to determine how customers react to commercials and link those reactions to future
purchasing decisions by utilizing machine learning and emotion recognition.
Background of the Study
Financial intermediation has undergone significant transformation during the past 20
years, claim Paolo Giudici, Branka Hadji, and Alessandro Spelta. The rise of FinTech has been
among the biggest changes. Fintech peer-to-peer lenders have opened up a variety of possibilities
for the credit services industry, including increased efficiency, enhanced client satisfaction, and
lower prices. However, peer-to-peer lending systems result in increased hazards, including higher
credit risk since they are not owned by the lenders and systemic risks because of the strong
connections that the platform creates among borrowers. To protect customers and maintain
financial stability, new and more precise credit risk models are required. In this paper, we suggest
using topological data encoded in similarity networks that is obtained from financial information
about borrowers to improve the accuracy of peer-to-peer platforms' credit risk estimation. The
predictive effectiveness of credit scoring models is enhanced by the use of topological
coefficients that describe the relevance of borrowers and community structures as additional
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explanatory variables. Through the delivery of more transparent, consumer-friendly, and
cost-effective loan services, these online platforms can now offer a substitute for traditional
financial intermediaries, increasing overall client value. Giudici and Misheva (2018); Claessens
et al. (2018).
The credit check assessment is the fundamental technique for minimizing credit risk in
the banking activity on the pre-contractual and contractual phases. Formal and legal capacity and
substantive capacity are two key criteria that are separated in the literature with regard to the
credit check. Since it incorporates both the human and the economic major parts of assessment,
the substantive check is a larger and more nuanced idea (Caplinsk and Tvaronaviien 2020).
Comparisons of credit scoring models, such as the Statistical-based Credit Scoring Models
Artificial Intelligence-based/Machine Learning Methods, conducted by Eddy and Engku Abu
Bakar (2017), show that while some techniques, particularly those based on artificial
intelligence, allow one to apply better credit scoring models, these techniques still fall short of
statistically based techniques because they are difficult to use and not user-friendly. As a result,
banks continue to favor statistically based scoring models as their preferred approaches. Logistic
regression is the most widely used of these methods.
The most crucial tool available to businesses today for gaining insights into their
customers is analytics. Because of this, businesses like Microsoft, Amazon, and Google, among
countless others, are investing extensively in not only gathering data but also enabling data for
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the industry, with the Big Data market expected to reach over $273 billion by 2023. The way we
use analytics is also evolving and growing as AI and machine learning continue to advance.
Businesses are increasingly concerned with extracting both predictive and prescriptive learnings
from the information they acquire, as opposed to just collecting descriptive data in the past about
their clients and products. Kalinda Ukanwa asserts that data analytics has significance. When it
functions effectively, it removes uncertainty from decision-making and may result in more
egalitarian outcomes. But AI must be vigilantly monitored and tweaked. There is often a simple
fix. Simply removing the gender factor from the bank loan example would have eliminated the
bias.
Machine learning (ML), in particular, artificial intelligence (AI), have expanded fast in
recent years in the context of data analysis and computing that normally allows the applications
to perform in an intelligent manner. The latest technologies in the fourth industrial revolution are
typically referred to as machine learning (ML), which gives systems the capacity to
automatically learn from experience and improve on it without being particularly programmed.
In general, the nature and properties of the data, as well as the success of the learning algorithms,
determine the effectiveness and efficiency of a machine learning solution. Techniques like
classification analysis, regression, data clustering, feature engineering and dimensionality
reduction, association rule learning, or reinforcement learning are available in the field of
machine learning algorithms to efficiently create data-driven systems. Due to the advancements
in data analytics research in the age of Big Data, Cloud digital ecosystem, etc., machine and deep
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learning are research areas in multidisciplinary domains that constantly change. Numerous
research, health, and industrial fields are altering as a result of new computing resources,
technology, and data sets. As technology develops, fresh solutions are sought in many fields to
handle complicated challenges, making the decision of which tools to use for data mining
projects extremely difficult.
Program Summary
FinTech in the Philippines has been gaining more attention in the recent years, especially
during the onset of COVID-19 pandemic when lockdowns are prevalent and cashless payment
methods are encouraged to limit exposure to health risks from face-to-face and cash-based
transactions. Digital payments and digital engagements of both men and women have increased,
and more and more banks and non-banks financial service providers have entered the digital
space, providing more diversified financial products and services through various platforms.
Despite these developments, however, the industry financial inclusion in the Philippines remains
lagging behind compared to ASEAN neighbors. In addition, FinTech has faced concerns
pertaining to the reliability and consistency not only of the systems but also of the regulations.
With the financial sector being heavily disrupted by digitalization, there is more to look into than
defining FinTech elements and considering it as just another service innovation. Defining the
interplay across the stages of FinTech transformation does not seem to be well explored in the
Philippines. This paper explores the state of the industry and investigates how to support the
development of the ecosystem to ensure that FinTech helps in the achievement of the country’s
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development goals. This paper finds that the Philippines has a strong FinTech industry as
indicated by an increasing number of FinTechs (particularly in payments, lending and Banking
technology verticals) and increasing capitalization. The FinTech industry can support the
country’s goals of financial inclusion but there needs to be an improvement in areas of
availability of talent and credit for the sector.
More than 400 financial institutions have become insolvent. Each institution was
determined by examiners to be ill-equipped to cover the unforeseen level of borrower defaults
and resulting losses they had to recognize. The common sentiment amongst these banks – “if
only we had seen this coming or had been better prepared…”
For this reason, many financial institutions are looking for a way to proactively identify
and quantify the risks that they face. In that pursuit, institutions are devoting an unprecedented
amount of time and resources towards developing or purchasing credit risk models that may
enhance their abilities to predict and quantify the credit risks they face. These credit models can
also enhance their abilities to calculate and assign sufficient economic capital reserves. These
efforts have been recognized and promoted by bank regulators and their macroprudential
policies.
One such risk model, the probability of default model (PDM), is at the forefront of
bankers’ and regulators’ minds. It is also used outside of banking to generally assess the
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creditworthiness of a company. A PDM helps a bank uniformly quantify credit risk – the
predominant source of risk for banks and the subject of strict regulatory oversight.
The PDM assesses credit risk, the risk of a loss resulting from the failure of borrowers to
meet payment obligations. The PDM estimates the likelihood that a particular loan or pool of
loans will not be repaid and, thus, will fall into default within a specified time horizon. A
probability of default model uses multivariate analysis and examines multiple characteristics or
variables of the borrower, and it will usually account for credit or business cycles by either
incorporating current financial data into the generation of the model or by including economic
adjustments.
Each variable’s coefficient in the PDM provides management with an indication of the
strength of correlation, whether positive or negative, between that variable and the occurrence of
default. The higher the coefficient’s magnitude, the more significant a relationship it has with
default.
Risk Management Strategy And Process
Risk management is a critical component of any business operation, particularly in the
financial sector. Over the years, innovative technologies have emerged to improve the way
companies manage risks. Three such innovations include improved credit models, analytics data,
and machine learning. These innovations have revolutionized the risk management process by
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enabling businesses to make more accurate predictions, identify potential risks, and take
appropriate measures to mitigate them. By leveraging these technologies, businesses can enhance
their risk management strategies and improve their decision-making processes, leading to better
outcomes and increased success.
Improve Credit Models, Analytics Data, Machine Learning
1. Identify the risk
In risk management, identifying the risk involves assessing the potential impact of a
particular event or situation on the organization. One way to improve the accuracy of this
assessment is by using more sophisticated credit models. By incorporating a wider range of data
points and taking into account more complex relationships between those data points, credit
models can help identify risks that might otherwise be missed. Analytics data can be used to
identify risks by providing insight into the underlying factors that drive risk. For example,
analytics data might reveal that a particular product line is consistently underperforming, which
could be an indication of a risk to the organization. Lastly, Machine learning algorithms can help
identify potential risks by analyzing large amounts of data, such as customer feedback, social
media sentiment, news articles, and financial reports. For example, sentiment analysis can be
used to identify negative sentiment towards a product or brand, which could indicate a potential
risk.
2. Analyze the risk
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Once the risk has been identified, the next step is to analyze it. Credit models can help
with this by providing more detailed information about the nature of the risk. For example, a
credit model might be able to identify specific factors that are driving the risk, such as a
particular geographic region or industry sector. For Analytics data it can help with risk analysis
by providing more detailed information about the nature of the risk. For example, analytics data
might reveal that a particular risk is more likely to occur in certain geographic regions or among
certain customer segments. Machine learning can also help to analyze risks by identifying
patterns and correlations in data that may not be immediately obvious. For example, predictive
analytics can be used to forecast the likelihood and potential impact of a risk based on historical
data.
3. Prioritize the risk
Once the risk has been analyzed, the next step is to prioritize it. Credit models can help
with this by assigning a probability of occurrence and severity score to each risk, which can be
used to prioritize risks based on their potential impact on the organization. Analytics data can
also be used to prioritize risks based on their potential impact on the organization. By analyzing
data on the frequency and severity of different types of risks, organizations can develop a risk
prioritization framework that helps them focus their resources on the risks that are most
important. Machine learning also can help to prioritize risks by assigning a risk score based on
the likelihood and potential impact of each risk. This can help organizations focus their resources
on the risks that are most critical.
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4. Treat the risk
Once the risks have been identified and prioritized, the next step is to treat them. Credit
models can help with this by providing information about potential mitigation strategies. For
example, a credit model might be able to suggest specific changes to the organization's lending
policies that could help mitigate the risk. Analytics data can be used to develop and implement
risk mitigation strategies. For example, analytics data might reveal that a particular product line
is consistently underperforming due to a specific issue, which could be addressed by making
changes to the product or marketing strategy. Machine learning can help organizations determine
the best course of action for treating risks. For example, decision trees can be used to identify the
most effective risk mitigation strategies based on the characteristics of the risk and the
organization's resources.
5. Monitor the risk
Finally, credit models can be used to monitor risks over time. By continuously updating
the credit model with new data, organizations can keep a close eye on potential risks and take
action to mitigate them before they become serious problems. Analytics data can be used to
monitor risks over time by tracking key performance indicators and other metrics. By monitoring
these metrics, organizations can identify potential risks early and take action to mitigate them
before they become serious problems. Machine learning can help organizations monitor risks by
detecting changes in data that may indicate a new or evolving risk. For example, anomaly
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detection can be used to identify unusual patterns in customer behavior or financial transactions
that may indicate fraud or other types of risk.
In conclusion, the implementation of improved credit models, advanced analytics data,
and machine learning in risk management strategy and process has revolutionized the way
financial institutions manage risk. These innovations have provided financial institutions with
more accurate and timely risk assessments, enabling them to make informed decisions and
mitigate potential losses. The integration of these technologies has also led to improved
efficiency in risk management processes, resulting in reduced costs and increased profitability
for financial institutions. However, it is important to note that these technologies are not without
limitations, and financial institutions must remain vigilant in ensuring that they are used ethically
and responsibly. Overall, the integration of improved credit models, analytics data, and machine
learning algorithms in risk management processes represents a significant step forward for the
financial industry, and it is likely that these technologies will continue to play a critical role in
managing risk in the years to come.
A risk management strategy involves performing risk assessment, risk response and risk
monitoring. It encompasses an organization-wide approach to dealing with risk, including the
assumptions made, risk constraints, priorities, tolerance and acceptance criteria. Innovation can
bring benefits, but it can also come with risks. The following are strategies that can be used to
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reduce the risk associated with three innovations in risk management strategy: improving credit
models, using analytics data, and machine learning.
Improving credit models:
a. Constant Monitoring: Constant monitoring and updating of credit models are critical to
reducing the risk associated with this innovation. Credit models should be reviewed regularly to
ensure they are aligned with current market conditions and customer behavior.
b. Diversification: Diversifying the types of data used in credit models can help reduce
the risk of relying on a single source of data. Incorporating alternative data sources such as social
media data, transactional data, and other non-traditional data sources can also provide additional
insights and improve the accuracy of credit models.
c. Testing: Conducting rigorous testing of credit models can help reduce the risk of
inaccurate predictions. This can include back-testing, stress-testing, and sensitivity analysis.
Use of analytics data:
a. Data quality: Ensuring the quality of data used for analytics is critical to reducing the
risk associated with this innovation. Data must be reliable, accurate, and timely.
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b. Data privacy: Protecting customer privacy is essential when using analytics data.
Organizations must ensure that customer data is secure and only used for the intended purpose.
c. Transparency: Providing transparency in how analytics data is used can help build trust
with customers and reduce the risk of negative impact on the reputation of the organization.
Machine Learning:
a. Human Oversight: Incorporating human oversight can help reduce the risk of machine
learning models making inaccurate or biased predictions. Human oversight can provide insights
into model outputs and identify potential issues.
b. Explainability: Ensuring the explainability of machine learning models can help reduce
the risk of incorrect predictions. Explainable AI can help provide insights into why a model
made a particular prediction.
c. Data quality: Ensuring the quality of data used in machine learning models is critical to
reducing the risk of inaccurate predictions. Data must be reliable, accurate, and representative of
the problem being solved.
Overall, it is essential to continually evaluate and update risk management strategies to
incorporate new innovations and technologies while minimizing potential risks.
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Responsible/ Executing Organization
Here’s the structure of the Risk Management Chart
The goal of risk management is to identify prospective problems before they occur, or to
try to exploit possibilities to cause them to occur. Risk-management actions may be used at any
time during the project's life cycle.
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Global Director
They are in charge of managing all global aspects of a specific element within their firm.
They manage a large network of workers and resources and employ specific techniques to
advance the company's goals and meet its demands.
In charge of planning and executing business development plans to help a company or
organization grow globally. Essentially, these professionals are in charge of sustaining and
expanding a company's global business presence across countries and marketplaces.
Financial Risk General Director
They are incharge of the process of safeguarding a company's economic value by
controlling its exposure to financial risk, namely operational risk, credit risk, and market risk,
with more specialized versions listed separately.
They identify and evaluate potential risks to an organization's success and propose
mitigation solutions. A financial risk manager is responsible for projecting changes in future
market trends as well as predicting the cost of these changes to the firm. The financial manager is
also responsible for suggesting risk coverages and establishing strategies for mitigating those
risks in order to maximize benefits.
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Environmental Risk General Director
Is defined as the real or potential hazard to living beings and the environment posed by
effluents, emissions, wastes, resource depletion, and other operations of a business. We assess
the financial impact of environmental risk to both the natural environment and the built
environments owned by the represented organization and others in business risk management.
Effectively identify, assess, and limit threats to air, land, water, and groundwater, as well
as noise harm. Protect human health and the environment. Follow through on your
environmental responsibilities.
Enterprise Risk Director
Creates an effective ERM framework, encompassing risk policies, metrics, reporting, and
monitoring. Ensures that risk management is in sync with corporate strategy. Provides guidance
for the deployment of risk management resources.
Encourage the use of risk management and risk ownership at all levels of the institution.
Create a risk-aware culture through education and training. Lead the processes for detecting,
analyzing, evaluating, responding to, controlling, monitoring, and reporting on critical risks at
the institution.
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Financial Risk Manager
Is the process of protecting a company's economic value by controlling its exposure to
financial risk - primarily operational risk, credit risk, and market risk, with more specific
versions listed separately.
They identify dangers to an organization's assets, earning capability, or success. Financial
risk managers (FRMs) may work in financial services, banking, loan origination, trading, or
marketing. Many of them specialize on topics such as credit or market risk.
Operational Risk Manager
Seeks to detect and mitigate the risk connected with a company's operations. Your tasks
as an operational risk manager include assessing business operations, recognizing problems, and
reporting on your findings.
A bachelor's degree in business administration, finance, accounting, or a related field, as
well as relevant experience, are required to begin a career as an operational risk manager.
Operational Risk Coordinator
Risk acceptance, mitigation, or avoidance is characterized as a continuous recurring
process that comprises risk assessment, risk decision making, and the deployment of risk
controls.
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Actions to identify and mitigate the risk connected with a company's operations. As an
operational risk manager, you will be responsible for assessing business operations, identifying
issues, and reporting on your findings.
Risk Management Process And Procedures
The process of identifying risk, understanding uncertainty, quantifying the uncertainty,
running models, analyzing results, and devising a plan. Risk analysis may be qualitative or
quantitative, and there are different types of risk analysis for various situations.
Risk analysts are detail-oriented professionals who evaluate and monitor risks their
employers take when doing business. They predict and assess outcomes that may positively or
negatively affect a company’s interests, provide estimates of costs associated with these risks and
may suggest measures to limit their adverse effects.
The role of a Risk analyst is to communicate risk policies and processes for an
organization. They provide hands-on development of risk models involving market, credit and
operational risk, assure controls are operating effectively, and provide research and analytical
support. Risk Managers must have excellent quantitative and analytical skills, along with the
ability to apply those skills across a variety of business processes.
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Risk Management duties and responsibilities of the job
The duties under a Risk Management job description include the following:
● Designing and implementing an overall risk management process for the organization,
which includes an analysis of the financial impact on the company when risks occur
● Performing a risk assessment: Analyzing current risks and identifying potential risks that
are affecting the company
● Performing a risk evaluation: Evaluating the company’s previous handling of risks, and
comparing potential risks with criteria set out by the company such as costs and legal
requirements
● Establishing the level of risk the company are willing to take
● Preparing risk management and insurance budgets
● Risk reporting tailored to the relevant audience. (Educating the board of directors about
the most significant risks to the business; ensuring business heads understand the risks
that might affect their departments; ensuring individuals understand their own
accountability for individual risks)
● Explaining the external risk posed by corporate governance to stakeholders
● Creating business continuity plans to limit risks
● Implementing health and safety measures, and purchasing insurance
● Conducting policy and compliance audits, which will include liaising with internal and
external auditors
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● Maintaining records of insurance policies and claims
● Reviewing any new major contracts or internal business proposals
● Building risk awareness amongst staff by providing support and training within the
company
Risk Identification
If financial institutions plan to use non-traditional data to improve credit models and use
data analytics and machine learning to market new products to specific customers, there are
several risks that should be identified and managed.
1. Data privacy and security
The use of non-traditional data and data analytics/machine learning requires access to a
large amount of data, including sensitive data such as financial and personal information.
This raises concerns about data privacy and security. If this data falls into the wrong
hands, it could be used for fraudulent activities, identity theft, or other malicious
purposes. There is also a risk of data breaches or cyber-attacks that could compromise the
integrity of the data or the entire system.
2. Model accuracy and validity
Using non-traditional data sources and machine learning algorithms requires high
accuracy and validity to make informed decisions. The models used for credit risk
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assessment and marketing strategies must be free from bias and accurately reflect the
customer’s risk profile. If the models are inaccurate or biased, they could result in
incorrect credit decisions and ineffective marketing strategies, which could harm the
financial institution's reputation and bottom line. For example, if the models used to
assess credit risk are biased against certain groups of customers, such as low-income
individuals or people of certain ethnicities, it could result in unfair treatment and a
negative impact on those customers. Similarly, if the models used for marketing are
inaccurate or not well-targeted, it could result in wasted resources and ineffective
campaigns.
3. Customer perception and trust
Using non-traditional data and data analytics/machine learning can raise concerns among
customers about privacy, fairness, and transparency. Customers may feel uncomfortable
with the use of their personal data in decision-making or with the use of algorithms that
they do not understand. This could result in a loss of customer trust and reputation
damage. For example, customers may not want their social media activity or online
shopping habits to be used to determine their creditworthiness or to be targeted for
specific marketing campaigns. Therefore, financial institutions need to be transparent
about how they are collecting, using, and protecting customer data, as well as providing
clear explanations of how algorithms are making decisions.
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4. Compliance with regulatory requirements
The use of non-traditional data and data analytics/machine learning in the financial
industry is subject to regulatory scrutiny. There is a risk that these initiatives may not be
compliant with existing regulations or that new regulations may be introduced that
restrict their use. Non-compliance can result in regulatory sanctions, fines, and legal
liability. For example, if GCash collects and uses personal information without obtaining
proper consent from customers, it may be in violation of data privacy laws such as the
Data Privacy Act of 2012 in the Philippines. Similarly, if Union Bank uses data analytics
and machine learning in its marketing strategies in ways that are deemed unfair or
discriminatory, it may be in violation of consumer protection laws or other regulations.
5. Technical issues
When implementing new technologies such as data analytics and machine learning, there
is always a risk of technical issues. This can be due to several reasons such as inadequate
testing, poor system integration, or unexpected errors in the data. Technical issues can
result in operational risks, particularly if the models are not properly integrated with
existing systems or if technical issues cause delays or errors in decision-making
processes. For example, if there are errors in the credit risk assessment model, customers
may be incorrectly denied or granted credit, resulting in financial losses for the
institution. Similarly, if the marketing strategies are not properly targeted or if there are
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technical issues with the delivery of marketing messages, the effectiveness of the
campaign may be reduced, resulting in lower customer engagement and revenue.
Risk Assessments Metrics
Credit Risk Models
Pros:
● Lending to high-risk borrowers, who are more prone to default on their loans, can assist
prevent this. It can be used to evaluate a potential borrower's creditworthiness.
● Helps financial institutions like banks in extending the appropriate loan amount.
● Helps to make automated decisions.
● Help financial institutions and banks in controlling their exposure to credit risk.
Cons:
● Inaccurate predictions regarding specific borrowers may be made by outdated systems
because to their tendency to neglect important factors.
● Financial losses
● Risk predictions do not promise low percentages of defaulted loans; because the method
is not scientific, it is possible to evaluate the outcomes in a number of different ways.
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Data Analytics
Pros:
● Helps an organization make better decisions
● Improve the effectiveness of the work
● It will keep you informed of any changes in your customers' behavior.
● Improving quality of products and services
Cons:
● May breach privacy of the customers
● Complex to use and require training
● Very difficult to select the right data analytics tools.
Machine Learning
Pros:
● Trends and Patterns Are Identified With Ease
● Machine Learning Improves Over Time
● Machine Learning Lets You Adapt Without Human Intervention
● Automation
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Cons:
● There’s a High Level of Error Susceptibility
● It May Take Time (and Resources) for Machine Learning to Bring Results
● Automation
Risk Analysis
Credit Risk Models
The use of credit risk models in the financial industry can have both positive and negative
effects. On the positive side, credit risk models can help financial institutions make more
informed lending decisions, particularly when it comes to high-risk borrowers who may be more
likely to default on their loans. This can help prevent financial losses and better control exposure
to credit risk. In addition, credit risk models can automate the lending decision-making process,
making it more efficient and faster. This can help financial institutions serve customers more
effectively and improve overall customer satisfaction.
However, there are also potential negative effects of credit risk models. Outdated systems
may produce inaccurate predictions regarding specific borrowers, leading to loans being denied
or granted incorrectly. Inaccurate models can also lead to financial losses for financial
institutions, particularly if they make lending decisions based on flawed or incomplete data.
Furthermore, risk predictions provided by credit risk models are not a guarantee of low
percentages of defaulted loans. This is because the methodology used to develop these models is
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not always transparent and can vary widely between institutions. As a result, it is important for
financial institutions to continually monitor and improve their credit risk models to ensure they
are accurate and effective.
Data Analytics
Data analytics can also have both positive and negative effects on organizations. On the
positive side, data analytics can help organizations make better decisions by providing insights
into customer behavior, market trends, and product performance. This can lead to more effective
work processes and better-quality products and services, ultimately improving customer
satisfaction. Data analytics can also keep organizations informed about any changes in their
customers' behavior, enabling them to adapt and respond quickly to changes in the market. This
can give organizations a competitive edge and help them stay ahead of the curve.
However, there are also potential negative effects of data analytics. One of the main
concerns is the breach of customer privacy, as the use of non-traditional data sources and
sensitive information can put customer data at risk. In addition, data analytics can be complex to
use and require specialized training, which can be expensive and time-consuming.
Selecting the right data analytics tools can also be a challenge, as there are many options
available, and it can be difficult to determine which tool is the best fit for a particular
organization. It is important for organizations to be aware of these potential negative effects and
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take steps to mitigate them, such as implementing robust data privacy and security measures and
providing training for staff.
Machine Learning
The use of machine learning in various industries can have both positive and negative
effects. On the positive side, machine learning can help identify trends and patterns with ease,
making it easier for financial institutions to make informed decisions. Additionally, machine
learning algorithms can improve over time as they are exposed to more data, leading to more
accurate predictions and insights and allowing financial institutions to adapt to changing market
conditions and customer needs without requiring human intervention. This can save time and
resources for organizations, allowing them to focus on other critical tasks.
However, there are also potential negative effects of machine learning in financial
institutions. One of the biggest concerns is the high level of error susceptibility that can occur
with machine learning algorithms. This is particularly true when the algorithms are based on
incomplete or biased data, which can lead to inaccurate predictions and decisions. Additionally,
it may take time and resources for machine learning to bring results, as large amounts of data
need to be processed and analyzed before useful insights can be generated.
Finally, the increasing use of automation in machine learning can lead to concerns about
job displacement and the role of humans in decision-making. It is important for organizations to
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carefully consider the potential impacts of machine learning on their workforce and to ensure
that ethical and responsible practices are employed.
Risk Mitigation Planning
There are five general steps in the design process of a risk mitigation plan:
1. Identify all possible events in which risk is presented. A risk mitigation strategy takes
into account not only the priorities and protection of mission-critical data of each
organization, but any risks that might arise due to the nature of the field or geographic
location. A risk mitigation strategy must also factor in an organization's employees and their
needs.
2. Perform a risk assessment, which involves quantifying the level of risk in the events
identified. Risk assessments involve measures, processes and controls to reduce the impact of
risk.
3. Prioritize risks, which involves ranking quantified risk in terms of severity. One aspect
of risk mitigation is prioritization -- accepting an amount of risk in one part of the
organization to better protect another. By establishing an acceptable level of risk for different
areas, an organization can better prepare the resources needed for BC, while putting fewer
mission-critical business functions on the back burner.
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4. Track risks, which involves monitoring risks as they change in severity or relevance to
the organization. It's important to have strong metrics for tracking risk as it evolves, and for
tracking the plan's ability to meet compliance requirements.
5. Implement and monitor progress, which involves reevaluating the plan's effectiveness
in identifying risk and improving as needed. In business continuity planning, testing a plan is
vital. Risk mitigation is no different. Once a plan is in place, regular testing and analysis
should occur to make sure the plan is up to date and functioning well. Risks facing data
centers are constantly evolving, so risk mitigation plans should reflect any changes in risk or
shifting priorities.
Risk Mitigation Implementation
Fintech has a lot of innovation in terms of modeling risk, such as a default model and the
ability to predict the ability to pay mobile phone users. Banks are trying to get statistics and
econometrics people to create models, and there are a lot of needs for modeling probability of
default. Fintech companies are using non-traditional information, such as telecom data, to predict
the ability to pay mobile phone users. Banks are trying to get statistics and econometrics people
to find and assume to create mode
Innovation always goes with how the products are being developed to actually welcome
what is happening now, fintech is supposed to disrupt the traditional banking and that's welcome
and that competition generally, thrives, innovation and in the end of consumers benefits.
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Here’s the strategies and skills:
Innovation of Modeling Risk
Is used to measure quantitative information such as a firm's market risks or value
transactions, and the model fails or performs inadequately and leads to adverse outcomes for the
firm.
Default Model
To determine default probabilities on credit obligations by a corporation or sovereign
entity. Default models often use regression analysis with market variables that are relevant to a
company's financial situation.
Improve credit models
The models, algorithms, formulae and other aspects of the automated credit scoring
system used to approve or deny an application for credit under a Program and adopted by Bank,
as further described in documentation for the Loan risk model provided by Company to Bank
from time to time.
Analytic Data Machine
Is the process of cleaning, analyzing, and visualizing data, with the goal of discovering
valuable insights and driving smarter business decisions. These functions help organizations
explore and use data to enable profitable and efficient decision-making.
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Machine Learning
in several marketing activities to predict customer behavior, personalize marketing
campaigns, optimize pricing strategies, and identify patterns in large data sets. It helps businesses
make data-driven decisions and improve marketing ROI.
Risk Tracking
Risk tracking is an essential component of risk management that involves monitoring and
assessing potential risks and their likelihood of occurring. It is the process of systematically
identifying, analyzing, and tracking risks throughout a project or business process to ensure that
they are appropriately managed and mitigated. By tracking risks, organizations can identify
potential problems early, develop contingency plans, and take proactive measures to minimize
the impact of risk events. Effective risk tracking helps organizations make informed decisions,
prioritize resources, and stay on track to achieve their objectives.
Step 1: Define the risks
The first step in tracking the risks of the three innovations - improved credit models, use
of analytics data, and machine learning - is to define the potential risks. These may include issues
such as data breaches, incorrect data analysis, algorithmic bias, or the use of outdated models.
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Step 2: Establish a risk management plan
Once the potential risks have been identified, a risk management plan should be
established. This plan should outline the specific steps that will be taken to mitigate each risk,
assign responsibilities for each action, and establish a timeline for implementation.
Step 3: Implement risk management procedures
Next, procedures should be put in place to actively manage and mitigate the identified
risks. This may involve regular monitoring of data sources, implementing quality control
measures for data analysis, and periodically reviewing models to ensure they remain accurate
and unbiased.
Step 4: Monitor risk indicators
To track the effectiveness of the risk management plan, key risk indicators should be
established and regularly monitored. These may include metrics such as the number of data
breaches or instances of algorithmic bias identified, as well as feedback from stakeholders on the
effectiveness of the risk management procedures.
Step 5: Conduct regular reviews
Periodic reviews of the risk management plan and procedures should be conducted to
ensure that they remain effective and relevant. These reviews may involve updating the plan to
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reflect new risks or changes in the business environment, or adjusting procedures to address
issues that have arisen.
Step 6: Foster a culture of risk management
Finally, it is important to foster a culture of risk management within the organization.
This involves promoting awareness of the risks associated with these innovations and
encouraging all stakeholders to take an active role in managing those risks. Regular training and
communication efforts can help to ensure that risk management remains a priority throughout the
organization.
These innovations have allowed financial institutions and businesses to gain deeper
insights into customer behavior, creditworthiness, and overall risk exposure. By leveraging large
datasets and advanced analytical tools, risk management professionals can identify potential risks
and take proactive measures to mitigate them. This has led to a more efficient and effective risk
management process, reducing the likelihood of losses and improving the overall financial health
of organizations. As these technologies continue to evolve and mature, we can expect even more
advanced risk tracking and management capabilities in the future.
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Appendices
Transcript
Interview questions and answers
1. Why did you choose to work as a Risk Manager or Risk Analyst?
I didn't exactly choose to be risk manager I just started of landed to the job back then I was I
just graduated from masteral degree and a friend of mine just heard from a fellow masteral
degree graduate whose working in a bank and they looking for someone whose in good in
numbers just old qualification that is I don't know the job they just mention it a bank a certain
banks it is PCI bank precursor of BDO right now they are looking for good in numbers they
took me in as a risk officer or junior risk officer specifically as a market risk analyst at that time
in 1995 in the same year there was a british bank risk bank collapse because of risk manager
failure so at the many bank started to build up risk management so it was a stroke of luck I
actually become a risk manager. I have been a risk manager for about 23 years and still doing
part time risk management in consultant day up to now.
2. What are the most important skills and qualities needed to be a Risk Manager or Risk
Analyst?
● Skill
I think the important skills that risk analyst or risk manager that should have is that they should
be good in numbers because there will be a lot of things that could be debt with that deals
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numbers so either you’re good with numbers yourself or verily you can understand numbers that
other people can share in out process for you because risk management is about part of a great
deal of a job. It is about measurement of a risk so in measurement of risk, you come up with
models, to measure viruses like for let it say for market risk, you wanna measure how much can
be lose in the stock market or the FX Foreign Exchange Market so there is a certain measures for
that and you need some basic mathematical statistics to be able to scratch those numbers so you
may have people working doing that for you but at least you should have be able to understand
basic concepts like variance, standard deviation, to be able to understand too well performed as
risk manager. That is one quantitative skill.
The other would be about, I would say communication skills. It is included there would be
assertiveness, well you need to be able to translate complex concepts into simple terms because
part of a reporting, let say a management or senior management or the board of directors, who
may not be familiar with your basic mathematical statistical models but you need to be able to
translate this statistical and mathematical concepts into lainmasters or in terms that an ordinary
people can understand so that is a part of a communication skills that where they can be able to
translate the complex into simpler terms. Second, the part of the communication skills is also
would be being direct, you need to be able to say things directly because you should not
sugarcoat whatever risk measure you’re telling. A risk manager job is be able to convey the risk
in the decision makers so you should be able to convey that message with that measure of risk as
neutral as possible so that the management can decide those things and normally the best way to
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convey could be in a direct way or normally free by biases decisions.
● Qualities
Some qualities would be assertiveness, as a risk manager one would be at odds with the business
because normally a risk manager is the one who's controlling the risk taking. inevitably there
would be instances that the risk manager would be or will have a different view/opinion from the
risk taker. the risk takers would be either the traders, lending officers, and marketing people so
they would wanna do business and take risk in the process but the risk manager would have to
set parameters and when the risk taking people are already going beyond the set parameters then
the risk manager has to assert and tell the risk taking units and officers that (No, you can no
longer do that because it's no longer part of the ap...) that's the very important skill because if you
cannot say no to a risk taker then theres no risk management effectively in the institution.
basically can do anything he wants, because nobody's there to check on him so that's how
important being assertiveness is. You need to understand the business, as a Risk officer you
cannot just simply say "no" because if you don't do anything or not take risk there's no profit to
be earned. Financial institutions for insues are in the business of taking risks and making profits
in return, but those have to be controlled risks.... A good risk manager would have to understand
the business, the risk manager role is not to stop the business, its to promote the business in a risk
acceptable way and the best way that the risk manager can add value if he understand the
business or let's say the risk takers want to do something but it would end violating certain risk
parameters of institution then the risk manager can provide some alternative ways of doing it.
creative ways of doing it, pursuing the goals of the business without necessarily unduly
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increasing the risks of the institution.... you have to be good at numbers, communicate well
simply and directly, assert, control and know the business. Those are some qualities a good risk
manager needs.
3. How would you build a Risk Management system from scratch?
Okay I'm, I'm presuming this is from a financial institution perspective. I'll take it from the bank
perspective for instance ... I've been a Risk Manager who built something from scratch… So the
first thing is getting the right people, so the right people must be someone who already has
experience so that you're able to build more easy and faster but if you don't have experience at
least get the people with the right attitudes and the right mindsets and the right qualities to absorb
learnings. So that's something that we built initially in the 1990's. Risk Management is quite a
new field in the Philippines so my boss got me so he was building the Risk Management System
of PSI Bank. They got me and other people who went into a lot of seminars for learning .We
tried to learn Value at Risk, (those are measures of market risk) Credit Policy etc. So we learn
and we learn, so many years we were learning and then whatever we learn, we apply in the bank
that we were working for, so we were building models and building measures and systems a. You
also need once you have the people in place you would have to provide, come up with the
manual so you you spend months drafting manuals, policy manuals and procedure manual at
some point aaa you might need to buy a system to help you to make calculation processes or
monitor the positions or risk exposures so that's basically you start somewhat with the need and
you'll be the leader who will get the right people who will develop, a read and research so that
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they can develop policies and procedures and eventually systems for the institution, I would say
that's how you build a Risk Management System from scratch. People first then training, policies
and processes systems
4. What are the different elements of a good risk report?
The different elements of a good risk report… There are several risk reports so normally, for a
risk area you would have a risk report with a different kind of risk, so you have market risk,
credit risk, operational risk, reputational risk, etc. A good risk report would have to fulfill its
function, so if it’s talking about credit risk then you have the credit risk measures and your
observation on that one. Now, second, it has to be tailored fit to your audience. Like me, as a
chief officer or division head, I would be reporting to the board of directors for the risk matching
committee. It's a high level committee composed of knowledgeable people in the high up there…
in hierarchy of the debt. They are intelligent people but not necessarily be a… very conversant in
the fairly big picture of risk. Though it has to be a simple report, a short report because you don’t
have time to… normally your audience are normally busy people so they need to be able to
quickly get your message. And normally, I would start a good report, with what we called
dashboard, a risk dashboard that normally starts with a summary of a bullet point that we wish
to convey. Let’s say in, if we have five points to convey in our report we would put it there, at the
top. So that if we don’t have time at the very least, we will cover those five bullet points. To start
that report with that dashboard and the main points. And then we go down, top down, or drill
down from those main points and we will discuss each of the points in detail. Let’s say for
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now… for this month , our report is about deteriorating credit risk exposure. So we would say
that, that line in the bullet point and then we will come up with a succeeding measures or body of
the report, we will come up with certain graphs or measures. Normally, we would have
comparative tables like nagte-trend for several months, normally about 6 months trend, how is
the… let’s say the past due ratio doing or the credit collection happening, how those measures
are depleted either graphically or in table.
So that’s it, a good risk report would cover all important areas of risk, credit, to operational, to
market, to liquidity, to reputational, etc. Then it would have a summary of bullet points plus
supplementary body that will contain measures, trends, graphs or tables.
5. What innovation do you think is needed nowadays in the financial industry?
New products happen, risk managers need to be up to date. Fintech is happening these days so
normally fintech companies are there to lend out to consumers or they go to payment business
and earn by fees like Gcash or payment being sent to the business model. Fintech has a lot of
innovation in terms of modeling risk. For instance, to support consumers lending it should have
a default model. Fintech banks companies need to know the probability of being paid. We have
to be able to shift the bad borrowers into good borrowers that innovation needs to come in.
Fintech innovate by using non traditional information, Fintech companies will get agreement to
telecom companies like Gcash or globe telecom data to use to be able to predict the ability to
pay of mobile phone users that's how gcash is trying to use telecom data to predict the ability to
pay, that's one innovation that fintech companies has it's not normally done by consumer banks
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or traditional banks that's where innovation happening using traditional data. Banks right now
are trying to get a lot of statistics and econometrics people so they can find and assume to create
models. There's a lot of needs for modeling probability of default that are innovations that come
in terms of newer models, newer insights something like globe did in terms of modeling
consumer behavior. You can also model banks like union bank for instance they are using data
science or data analytics to model consumer behaviour interms of trying to push what products
can be sold of to the customers, social media algorithms, facebooks and twitter ads are basically
whatt we see on our news feeds are basically products of social media algorithms application, it
tailor fit to your profile it tend if you are watching live kdrama or kpop things, kpop thing will
flood to your feed that kind of technology and data analytics and machine learning is also being
trive and being applied in business of banking and push the products, if banks knows that your
young like Gen Z or Mellenials rather with a good job or you're from wealthy family, banks will
offer certain bank products to you and that how they doing it to you, profiling their customers so
they will know which product push to you the bank will have greatest share of you and cosnumer
wallet and thats how they using machine learning data science data analytics to innovate the
financial industry, I give two things atleast, the used of gcash using non-traditional data to
improve credit models, and union bank using data analytics machine learning to push or market
new market new products specific and targeted customer. I think, innovation always go with how
the products are being developed to actually welcome what happening now, fintech is supposed
to disrupt the traditional banking and that's welcome and that competition generally, trives,
innovation and in the end of consumers benefits.
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Documentation
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Curriculum Vitae
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References
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New Era University

College of Business Administration

COLLEGE OF BUSINESS ADMINISTRATION

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS OF

Ms. NORILYN BRUN

Risk Management Strategy And Process 11

Responsible/ Executing Organization 18

Risk Management Process And Procedures 22

Risk Assessments Metrics 27

Risk Mitigation Planning 32

Risk Mitigation Implementation 33

conduct transactions with clients.

by tailoring a marketing message to a specific client or by recognizing and reducing business

Second is to inform business decision-making, data analytics can be used by businesses to

to forecast consumer behavior and enhance marketing initiatives. It is a form of artificial

purchasing decisions by utilizing machine learning and emotion recognition.

Background of the Study

Financial intermediation has undergone significant transformation during the past 20

predictive effectiveness of credit scoring models is enhanced by the use of topological

explanatory variables. Through the delivery of more transparent, consumer-friendly, and

Artificial Intelligence-based/Machine Learning Methods, conducted by Eddy and Engku Abu

regression is the most widely used of these methods.

classification analysis, regression, data clustering, feature engineering and dimensionality

projects extremely difficult.

indicated by an increasing number of FinTechs (particularly in payments, lending and Banking

country’s goals of financial inclusion but there needs to be an improvement in areas of

availability of talent and credit for the sector.

determined by examiners to be ill-equipped to cover the unforeseen level of borrower defaults

only we had seen this coming or had been better prepared…”

Risk Management Strategy And Process

Risk management is a critical component of any business operation, particularly in the

outcomes and increased success.

Improve Credit Models, Analytics Data, Machine Learning

1. Identify the risk

2. Analyze the risk

3. Prioritize the risk

on the risks that are most critical.

4. Treat the risk

is consistently underperforming due to a specific issue, which could be addressed by making

5. Monitor the risk

that may indicate fraud or other types of risk.

In conclusion, the implementation of improved credit models, advanced analytics data,

managing risk in the years to come.

monitoring. It encompasses an organization-wide approach to dealing with risk, including the

models, using analytics data, and machine learning.

Improving credit models:

insights and improve the accuracy of credit models.

Use of analytics data:

into model outputs and identify potential issues.

made a particular prediction.

the problem being solved.

Overall, it is essential to continually evaluate and update risk management strategies to

incorporate new innovations and technologies while minimizing potential risks.

Responsible/ Executing Organization

Here’s the structure of the Risk Management Chart

time during the project's life cycle.

advance the company's goals and meet its demands.

In charge of planning and executing business development plans to help a company or

expanding a company's global business presence across countries and marketplaces.