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Risk Working Papers

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.

Recent articles

Article

The future of bank risk management

– Banks have made dramatic changes to risk management in the past decade—and the pace of change shows no signs of slowing. Here are six initiatives to help them stay ahead.
Article

Managing supplier risk in the transportation and infrastructure industry
– Introducing systematic risk-management tools, particularly in the supplier-selection process, could help mitigate problems associated... with the industry.
Article

Managing the people side of risk
– Companies can create a powerful risk culture without turning the organization upside down.
Article

Voices on bank transformation: Insights on creating lasting change
– This paper draws together the perspective of McKinsey experts on organizational health, risk culture, and digital transformation... with the experience of five successful CEOs and chairmen to illustrate the changes reshaping banks.
Article

People and talent management in risk and control functions
– Risk-management functions in corporates and financial institutions face more and more challenges to recruit, develop, and retain... the right people. Here are five strategic initiatives that can help.
Article

A marathon, not a sprint: Capturing value from BCBS 239 and beyond
– Meeting more stringent regulations requires banks globally to spend billions of dollars. Yet with the right long-term strategy,... they could realize even bigger annual savings.
Article - McKinsey Quarterly

An executive’s guide to machine learning
– It’s no longer the preserve of artificial-intelligence researchers and born-digital companies like Amazon, Google, and Netflix.
Article

Improving disaster recovery
– When natural disasters strike, governments step up. Here’s how they can improve the odds of a successful long-term recovery.
Book Excerpt - McKinsey Quarterly

Repelling the cyberattackers
– Organizations must build digital resilience to protect their most valuable information assets.
Report

Developing robust PPNR estimates
– This white paper is an in-depth review of what banks need to do to meet increasing expectations for pre-prevision net revenue... models that have become the cornerstone for the annual round of high stakes stress tests supervised by the Federal Reserve.
Article

Taking the stress out of operational-risk stress testing
– Financial institutions are facing heightened supervisory scrutiny, but those that establish a structured and calibrated approach... to operational-risk stress testing will thrive.
Article

The age of utility: Are you a force that shapes the power markets, or do the forces shake you?
– The rapidly changing energy business environment offers significant opportunities to transform incumbent utilities into more dynamic... and profitable enterprises. Agility will be the key to success–or survival–for incumbent utilities.
Report

McKinsey Capital Management Survey 2015
– Our annual survey on capital management at leading banks gathered data from 15 German banks. Although they have substantially... increased capitalization over the past five years, additional measures will be required as Basel III is phased in.
Article

P&L forecasting–the new horizon of stress testing, and beyond
– Banks have not invested much into modelling capabilities for profit and loss, particularly in Europe. If they want to anticipate... and possibly shape the regulatory agenda, they need to do so now.
Article

A best-practice model for bank compliance
– Tighter compliance regulations have challenged financial institutions in a variety of ways. Yet those who adapt best may enjoy... a distinct competitive advantage.

2014 article archive

Article

Enterprise-risk-management practices: Where’s the evidence?
– A survey across two European industries.
Article

Europe’s wholesale gas market: Innovate to survive
– The risks against a structural long position have increased. Here’s how major gas distributors can react through improved... product design.
Article

Introducing a holistic approach to stress testing
– Seven steps may help banks develop better stress tests.
Report

A time for stress: The challenges facing Europe's banks
– In November the European Central Bank (ECB) will officially take overall responsibility for the supervision of major European... banks under the Single Supervisory Mechanism. This is one of the biggest structural changes in the financial-services regulatory environment in the past 30 years. Europe's banks are facing tough new minimum that they need to make some major changes.
Report

Risk in emerging markets: The way forward for leading banks
– This paper looks at challenges facing emerging market banks after a decade of outstanding growth and makes a series of recommendations.

2013 article archive

Report

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

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

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

Concrete steps for CFOs to improve strategic risk management
– 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.
Report

Between deluge and drought: Liquidity and funding for Asian banks
– 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.
Report

Managing third-party risk in a changing regulatory environment
– 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.
Report

Next-generation energy trading: An opportunity to optimize
– The report 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!
Report

Between deluge and drought: The future of US bank liquidity and funding
– This working paper discusses the funding structure of large US financial institutions which are undergoing a dynamic shift.
Report

The hypotenuse and corporate risk modeling
– 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.
Report

Strategic choices for midstream gas companies
– This working paper examines the strategic dilemmas facing European midstream gas companies and suggests ways they can address... their challenges by applying a risk-adjusted portfolio approach called Gas Portfolio @ Risk. The paper explains how the market has evolved such that midstreamers face a strategic squeeze from both downstream and upstream gas companies. A portfolio approach has the potential to save them from large future losses.
Report

Strategic commodity and cash-flow-at-risk modeling for corporates
– This working paper describes how corporates have been adapting and evolving their use of quantitative models derived from the... use of VAR models by financial services companies and banks. Corporates have developed sophisticated commodity risk models which they are using to inform strategic decisions based on the impacts on cashflows of different exposure sets. The paper explains how these models can deliver value, and also sets out in simple terms how a CFAR model can be built and deployed.

2012 article archive

Report

Managing market risk: Today and tomorrow
– 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.
Report

Compliance and control 2.0: Unlocking potential through compliance and quality-control activities
– This report 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 report is of direct relevance to all of our banking clients, but its central message is also relevant for any risk and compliance function.
Report

Driving value from postcrisis operational risk management
– 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.
Report

Day of reckoning for European retail banking
– This report 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.
Report

Strategic insight through stress-testing: How to connect the 'engine room' to the boardroom
– This report offers an overview of stress testing as a management and regulatory tool in banking. The report 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 program for achieving greater positive impact from stress testing, including modeling P&L and liquidity impacts and using scenarios more effectively.
Report

First-mover matters: Building credit monitoring for competitive advantage
– 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.
Report

Capital management: Banking's new imperative
– The report 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.
Report

Commodity trading at a strategic crossroad
– This report 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.
Report

Enterprise risk management: What's different in the corporate world and why
– This report 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.

2011 article archive

Report

The use of economic capital in performance management for banks
– 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.
Report

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

Strengthening risk management in the US public sector
– 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.
Report

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

New credit-risk models for the unbanked
– Lenders can use big data to create meaningful value for their enterprise, better outcomes for borrowers, and significant social... impact.
Report

Good riddance: Excellence in managing wind-down portfolios
– Around the world banks are shedding assets. A new paper looks at the practices they are using to preserve value.
Report

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

2010 article archive

Report

Taking control of organizational risk culture
– 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.
Report

A board perspective on enterprise risk management
– 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.
Report

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

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

Getting to grips with counterparty risk
– 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.
Report

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

Credit underwriting after the crisis
– 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.
Report

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

Getting risk ownership right
– 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.

2009 article archive

Report

Upgrading your risk assessment for uncertain times
– 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.
Report

Responding to the variable annuity crisis
– 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.
Report

Best practices for estimating credit economic capital
– 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.
Report

Bad banks: Finding the right exit from the financial crisis
– 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.
Report

Risk modeling in a new paradigm: Developing new insight and foresight on structural risk
– 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.
Report

The national credit bureau: A key enabler of financial infrastructure and lending in developing economies
– 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.
Report

Capital ratios and financial distress: Lessons from the crisis
– 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.

2008 article archive

Report

The risk revolution
– 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.
Report

Making risk management a value-added function in the boardroom
– This working paper addresses the role of the Board in understanding enterprise risk management (ERM) and governance.
Report

Incorporating risk and flexibility in manufacturing footprint decisions
– 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.
Report

Liquidity: Managing an undervalued resource in banking after the crisis of 2007-2008
– This paper examines liquidity management in banks in the context of the credit and liquidity crisis that began in 2007.
Report

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

Probabilistic modeling as an exploratory decision-making tool
– 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.
Report

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

Shaping strategy in a highly uncertain macro-economic environment
– 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.