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Risk working papers and other publications

McKinsey's Risk Working Papers present McKinsey's best current thinking on risk and risk management. They represent a broad range of views, both sector specific and cross-cutting, and are intended to encourage discussion internally and externally. In addition, please see a list of selected publications by practice members in other journals at the bottom of this page, or browse articles on risk in the McKinsey Quarterly.

 

Hypotenuse and corporate risk modeling
report | McKinsey Working Papers on Risk, No. 49

The hypotenuse and corporate risk modeling

August 2013—This working paper uses the concept of the hypotenuse to explain how companies facing several risk variables often overlook the fact that one or two of them can have a disproportionate influence in relation to the others. In mathematics, the long side of a right-angled triangle influences the hypotenuse much more than the short side. Ditto, when modeling risk or volatility factors, companies should consider the proportions represented by the different factors, because the outcomes can be greatly affected.

Bank liquidity and funding
report | McKinsey Working Papers on Risk, No. 48

Between deluge and drought: The future of US bank liquidity and funding

July 2013—This working paper discusses the funding structure of large US financial institutions which are undergoing a dynamic shift.

Next-generation energy trading
report | McKinsey Working Papers on Risk, No. 47

Next-generation energy trading: An opportunity to optimize

May 2013—The paper explores the dilemma facing energy trading companies as they address the legacy issues of complex systems, high costs and often unclear governance structures. It looks at some of the main ways the trading firms can reduce their costs and their complexity, suggesting that there are large potential economic gains to be had. Among their competitors are investment banks with much greater cost efficiencies in their trading operations. It's tough out there!

Managing third-party risk in a changing regulatory environment
report | McKinsey Working Papers on Risk, No. 46

Managing third-party risk in a changing regulatory environment

May 2013—It makes pretty sobering reading – financial services firms in the US face an unprecedented extension of their risk management – not only are they responsible for what they do themselves, but they now have to consider their suppliers and vendors. If these third parties get it wrong, then the bank or credit card firm can find itself on the hook to regulators and consumers for what has happened at one remove. It adds up to a massive expansion of the routine due diligence required by financial services firms and an opportunity for truly innovative conversations with our clients on an unanticipated aspect of risk management.

Liquidity and funding situation in Asia
report | McKinsey Working Papers on Risk, No. 45

Between deluge and drought: Liquidity and funding for Asian banks

April 2013—Strategic management of funding and liquidity will play an increasingly important role for Asian banks. Management should start preparing now to face future challenges, including maturity mismatches and the overall need for long-term funding to support growth.

Concrete steps for CFOs to improve strategic risk management
report | McKinsey Working Papers on Risk, No. 44

Concrete steps for CFOs to improve strategic risk management

April 2013–The role played by CFOs give them a natural, and perhaps unique, “in” when it comes to incorporating risk concerns into broader business planning processes. By sponsoring tighter coupling between risk and planning and by championing risk-informed analytics, CFOs can help significantly to enhance the risk-return thinking at the highest levels of strategy making.

A roadmap for banks
report | McKinsey Working Papers on Risk, No. 43

Getting to ERM: A road map for banks and other financial institutions

March 2013—This working paper contains a diagnostic framework for assessing an organization's ability to manage risk at the enterprise level. McKinsey's ERM framework can help to shape discussion by senior management of ERM capabilities and shortcomings.

Governments efficient in spending
report | McKinsey Working Papers on Risk, No. 42

Risk-based resource allocation: Focusing regulatory and enforcement efforts where they are needed the most

February 2013—Risk-based allocations of scarce resources is a necessary discipline for governments to demonstrate that they are becoming more efficient in their spending. This paper sets out an effective, 4-step process for better risk-based resource allocations.

Prospects for European banks’ funding
report | McKinsey Working Papers on Risk, No. 41

Between deluge and drought: The divided future of European bank-funding markets

March 2013—Despite some apparent short-term relief, culminating in the repayment by banks of some of the funds advanced to them by the European Central Bank (ECB), the long-term picture remains both complex and uncertain.

Enterprise risk management
report | McKinsey Working Papers on Risk, No. 40

Enterprise risk management: What's different in the corporate world and why

December 2012–This paper captures many years of experience in both the corporate and FIG worlds, explaining what each might learn from the other and where there might be pitfalls if techniques and approaches to ERM are imported unthinkingly across sectors.

Commodity trading at a strategic crossroad
report | McKinsey Working Papers on Risk, No. 39

Commodity trading at a strategic crossroad

December 2012–This paper calls attention to the pressures faced by commodity traders in light of extremely competitive markets conditions and a plethora of existing and impending regulation. This is an industry on the cusp of profound changes.

Capital management: Banking's new imperative
report | McKinsey Working Papers on Risk, No. 38

Capital Management: Banking's new imperative

November 2012–The paper is the latest version of our annual survey on capital management practices at leading banks and highlights some of the tensions between regulatory capital and economic capital approaches. It is of enormous relevance to all of our banking risk clients, featuring insights it gives into the uses of RWA optimization programs and the impacts of Basel II.5 and III.

First-mover matters: Building credit monitoring for competitive advantage
report | McKinsey Working Papers on Risk, No. 37

First-mover matters: Building credit monitoring for competitive advantage

October 2012–The paper assesses the challenge facing banks' core credit operations, which are under severe pressure from regulators and market conditions. Banks with superior credit processes have a strategic opportunity to create competitive advantage.

Day of reckoning for European retail banking
report | McKinsey Working Papers on Risk, No. 36

Day of reckoning for European retail banking

July 2012—This paper captures months of work assessing the impact of regulatory changes, their likely effects on bank ROEs and what banks can do to try to protect their franchises most effectively. It is obvious relevance to European banking clients, but less obviously should be of great interest to non-European institutions eyeing possible strategic moves into weakened markets.

How to connect the engine room to the boardroom
report | McKinsey Working Papers on Risk, No. 35

Strategic insight through stress-testing: How to connect the 'engine room' to the boardroom

July 2012—This paper offers an overview of stress testing as a management and regulatory tool in banking. The paper suggests ways that banks can use stress tests and their component parts to connect strategic thinking at Baord and senior management level to meaningful actions across their organizations. It offers a five-step programme for achieving greater positive impact from stress testing, including modeling P&L and liquidity impacts and using scenarios more effectively.

Effective operational risk management approach
report | McKinsey Working Papers on Risk, No. 34

Driving value from postcrisis operational risk management

June 2012—Banks and other financial institutions can generate important improvements in their operating model if they focus more on areas that have previously been viewed as relatively basic. Operational Risk is often at the heart of major events that can lead to significant loss of value. The authors argue that there are some common challenges facing banks wanting a more effective operational risk management approach, and then explain how these can be approached.

Broader approach to compliance
report | McKinsey Working Papers on Risk, No. 33

Compliance and control 2.0

June 2012—This paper is a comprehensive look at how banks can turn a necessary set of regulatory tasks into a meaningful strategic advantages. It makes the convincing case that banks need a broader approach to compliance, expanding its definition and impact throughout their organizations. The paper is of direct relevance to all of our banking clients, but its central message is also relevant for any risk and compliance function.

Managing market risk
report | McKinsey Working Papers on Risk, No. 32

Managing market risk: Today and tomorrow

May 2012—A new survey shows some common themes and some interesting variances in the ways that big banks deploy Value-at-Risk, the industry standard approach to measure market risk.

Managing wind-down portfolios
report | McKinsey Working Papers on Risk, No. 31

Good riddance: Excellence in managing wind-down portfolios

April 2012—Around the world banks are shedding assets. A new paper looks at the practices they are using to preserve value.

New credit-risk models for the unbanked
report | McKinsey Working Papers on Risk, No. 30

New credit-risk models for the unbanked

March 2012—Lending to lower-income customers is challenging for both traditional consumer finance and microfinance. A third way is emerging, based on increased computing power and new sources of data.

Day of reckoning?
report | McKinsey Working Papers on Risk, No. 29

Day of reckoning? New regulation and its impact on capital-markets businesses

July 2012—New regulation will dramatically lower returns in capital markets businesses. Banks can take some steps to ameliorate the effects, but the long-term health of these businesses is in question.

strengthening risk management
report | McKinsey Working Papers on Risk, No. 28

Strengthening risk management in the US public sector

May 2011—As it seeks to protect the public, government takes on many of the biggest risks around. But the challenges of managing risk from the public sector are substantial. Government agencies can take five steps to improve their risk management practices.

mastering icaap
report | McKinsey Working Papers on Risk, No. 27

Mastering ICAAP: Achieving excellence in the new world of scarce capital

May 2011—In the wake of the financial crisis, regulators have put most of their energies into Pillar 1 reform. Now they are turning to Pillar 2 and the Internal Capital Adequacy Assessment Process (ICAAP) to rein in other risks and to accelerate the work on Pillar 1. Banks must rapidly develop a playbook of ICAAP strategy if they are to get out in front of this new regulatory trend.

basel III and european banking
report | McKinsey Working Papers on Risk, No. 26

Basel III and European banking: Its impact, how banks might respond, and the challenges of implementation

November 2010—Basel III will have significant impact on the European banking sector. We estimate that by 2019 the industry will need about €1.1 trillion of additional Tier 1 capital, €1.3 trillion of short-term liquidity, and about €2.3 trillion of long-term funding, absent any mitigating actions. The impact on the smaller US banking sector will be similar, though the drivers of impact vary.

implications of financial regulations for US banking
report | McKinsey Working Papers on Risk, No. 25

Assessing and addressing the implications of new financial regulations for the US banking industry

March 2011—According to the Financial Services Roundtable, the 2,300-page Dodd-Frank Act mandates more than 200 new regulations and 67 studies and reports to be conducted by regulators over the next two years. The resulting legislation could translate into an estimated 15,000 to 20,000 pages of new rules and compliance requirements for financial institutions.

use of economic capital
report | McKinsey Working Papers on Risk, No. 24

The use of economic capital in performance management for banks

January 2011—Amid heightened concern about the future of regulatory-capital requirements, economic-capital modeling is enjoying a renaissance in the post-crisis banking world. At its best, economic capital can improve banks’ capital allocation, business-performance tracking, and risk management.

getting risk ownership right
report | McKinsey Working Papers on Risk, No. 23

Getting risk ownership right

November 2010—In the new risk paradigm, an organization will take on only those risks for which it has three core lines of defense—a resilient and flexible business model, well-developed risk skills and capabilities, and sufficient financial strength to absorb risk if it should materialize.

managing risk from the c-suite
report | McKinsey Working Papers on Risk, No. 22

Top-down ERM: A pragmatic approach to managing risk from the C-suite

August 2010—An ERM system that quickly enables risk thinking in the C-suite should focus on the "top-down" elements of risk management in conjunction with the more usual "bottom-up" ones.

credit underwriting
report | McKinsey Working Papers on Risk, No. 21

Credit underwriting after the crisis

September 2010—This document outlines the key structural trends that are reshaping banks' credit underwriting processes and discusses practical measures banks should take to extract significantly higher value from lending operations.

getting to grips with counterparty risk
report | McKinsey Working Papers on Risk, No. 20

Getting to grips with counterparty risk

June 2010—Counterparty risk stalks the financial system. In this 16-page client-ready article, the authors outline a four-step approach to help banks and other financial institutions manage and mitigate this pervasive risk.

variable annuities in europe after the crisis
report | McKinsey Working Papers on Risk, No. 19

Variable annuities in Europe after the crisis: Blockbuster or niche product?

February 2010—This article examines the potential of variable annuities to become a blockbuster product after the crisis, and considers the strategic choices and operational challenges life insurers face in offering them.

enterprise risk management
report | McKinsey Working Papers on Risk, No. 18

A board perspective on enterprise risk management

February 2010—Boards play a crucial role in risk oversight. This article outline twelve specific actions corporate directors should take to ensure their company's ERM capabilities are at the level of best practice.

how institutional investors can rethink risk management
report | McKinsey Working Papers on Risk, No. 17

After black swans and red ink: How institutional investors can rethink risk management

April 2010—This article outlines how institutional investors in particular can improve their risk management practices along five dimensions: risk transparency and insight, risk appetite and strategy, risk-related processes, risk organization and governance, and risk culture.

taking control of organizational risk culture
report | McKinsey Working Papers on Risk, No. 16

Taking control of organizational risk culture

February 2010—This paper offers a methodical definition of risk culture and puts forward a model for how organizations can assess their risk culture, and then intervene in areas where this culture might be vulnerable. It also provides real case examples of the application of this approach.

capital ratios and financial distress
report | McKinsey Working Papers on Risk, No. 15

Capital ratios and financial distress: Lessons from the crisis

December 2009—Global regulators are in the process of imposing new capital requirements intended to result in both higher and better quality capital. We analyze what indicators would have been good predictors of distress for banks during the crisis.

national credit bureau
report | McKinsey Working Papers on Risk, No. 14

The National Credit Bureau: A key enabler of financial infrastructure and lending in developing economies

December 2009—The challenges of lending in developing economies are unique. Establishing a credit bureau from scratch in an emerging market is a multi-year program requiring a phased approach to accomplish a vision involving a number of banks and services.

risk modeling in a new paradigm
report | McKinsey Working Papers on Risk, No. 13

Risk modeling in a new paradigm: developing new insight and foresight on structural risk

May 2011—Why did sophisticated risk management tools fail to predict the 2008 crisis? Many have argued this question at length, and one important conclusion is disturbingly simple: managers relied too heavily on short-sighted models and too lightly on their own expertise and insight.

bad banks
report | McKinsey Working Papers on Risk, No. 12

Bad banks: Finding the right exit from the financial crisis

August 2009—This working paper explains the different options available to banks and governments considering using a ‘bad bank’ mechanism to contain bad assets. It sets out the main factors to be considered and assesses the different strategies undertaken by various governments.

best practices for estimating credit economic capital
report | McKinsey Working Papers on Risk, No. 11

Best practices for estimating credit economic capital

April 2009—This paper looks at the use of capital models in banks; it shows that there is a wide range of practice, with banks using an array of techniques and approaches depending on their business mix.

annuity crisis
report | McKinsey Working Papers on Risk, No. 10

Responding to the variable annuity crisis

April 2009—This paper examines the crisis faced by the U.S. insurance sector as the consequences of the huge growth in variable annuities hit home. It describes the crisis and suggests strategies for short- and medium-term survival.

upgrading your risk assessment
report | McKinsey Working Papers on Risk, No. 9

Upgrading your risk assessment for uncertain times

January 2009—In conditions of high uncertainty many companies are asking increasingly demanding questions about risk assessment. This paper considers what can be learned from approaches that have worked well and lays out six imperatives for effective risk assessment throughout economic cycles.

shaping strategy in an uncertain macroeconomic environment
report | McKinsey Working Papers on Risk, No. 8

Shaping strategy in an uncertain macro-economic environment

December 2008—This working paper sets out an approach for strategists to stress-test their corporate strategy for macroeconomic uncertainty, and to develop a "through-cycle" view to ensure their company both survives the present slowdown and comes out stronger.

option games
Report | McKinsey Working Papers on Risk, No. 7

"Option games": Filling the hole in the valuation toolkit for strategic investment

October 2008—The paper describes how strategic decisions can benefit from analysis using techniques drawn from both real options and game theory. It explains the trade-off between flexibility and strategic commitment and offers a toolkit for making choices in competitive markets.

probabilistic modeling
report | McKinsey Working Papers on Risk, No. 6

Probabilistic modeling as an exploratory decision-making tool

September 2008—This working paper highlights how probabilistic modeling can fail when used in the wrong way. It explains two different relevant definitions of the term probability, discusses some fundamental problems in dealing with uncertainty, and gives concrete examples how probabilistic modeling can be used well.

turning risk management into a competitive advantage
report | McKinsey Working Papers on Risk, No. 5

Turning risk management into a true competitive advantage: Lessons from the recent crisis

September 2008—While there are important lessons to be learned from the recent turmoil in credit and liquidity, the core message of this paper is that banks also have an opportunity to turn good risk management into a true competitive advantage.

managing liquidity
report | McKinsey Working Papers on Risk, No. 4

Liquidity: Managing an undervalued resource in banking after the crisis of 2007-2008

September 2008—This paper examines liquidity management in banks in the context of the credit and liquidity crisis that began in 2007.

risk and flexibility in manufacturing footprint decisions
report | McKinsey Working Papers on Risk, No. 3

Incorporating risk and flexibility in manufacturing footprint decisions

September 2008—This working paper illustrates some of the pitfalls companies have encountered in optimizing manufacturing footprint, and it outlines a more holistic approach that includes systematically identifying key uncertainties and flexibility factors and quantifying their impact.

making risk management a value-added function
report | McKinsey Working Papers on Risk, No. 2

Making risk management a value-adding function in the boardroom

September 2008—This working paper addresses the role of the Board in understanding enterprise risk management (ERM) and governance.

the risk revolution
report | McKinsey Working Papers on Risk, No. 1

The risk revolution

September 2008—This paper discusses the historical emergence of risk management, reviewing a number of key developments and their impact on the financial sector; it draws on examples from the energy industry to illustrate the way in which risk management can transform the fortunes of nonfinancial companies. Finally, the paper sets out a comprehensive framework that companies can use to develop a disciplined, strategic integrated risk-return management process.

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