Blogs on 11th June 2021
For those of us who have been in the finance eco-system for the last 15 years, it has been quite the education. During this time we have seen several cycles in the economy. Some of the cycles have been more tolerant of risk than others. From a function of both macro and micro dynamics, it has been a rollercoaster ride of risk awareness in all sectors of the economy. Starting with the explosion of risk tolerance & acceptance in the mid 2000s, to the tightness of credit quality to end the decade due to the Great Financial Recession of ‘08. The mid 2010s began to loosen the restraints of credit quality, but the air pocket was brief. By the time the global pandemic took hold in early 2020, credit markets due to the lockdowns [labor participation and supply chain disruptions] set aside loan loss provisions as a new kind of risk presented itself in the form of public health awareness for the consumers and individuals. This kind of risk, while not new in history, reminded us of the risks associated with global social mobility in transportation, manufacturing, travel, leisure, and hospitality + retail services. What was deemed necessary or discretionary became apparent near instantaneously overnight. The real essential workers took the front stage to keep our food supply stocked, public safety services running, and healthcare systems online at the ready. This public health approach to risk awareness continues to be the case in emerging economies such as India and South America currently.
Risk appetite has ebbed and flowed in the span of 20 years quite swiftly. With that so has risk tolerance. Risk appetite is a central tenant of operations for creditors. Be it at the corporate level on which and what investments to make, the timing [terms] of those investments, and the broader long term decisions a financial shop chooses to make.
While it matters the conditions and environment in which a firm operates, the broader headwinds of regulation, policy, trade, domestic, and foreign policy should be watched; it isn’t the only factor of the risk pillar to manage at the enterprise level. Instead the operating principles to guide teams should be built in the nucleus of the business. All businesses achieve success differently, even those businesses in the same industry. The operators and the business models they choose guide them to achievement ultimately are the difference maker. A crucial part of business model execution is operating with appropriate risk tolerance and appetite. At the enterprise level risk appetite takes a much different approach than an individual’s personal risk appetite. It is a layered, multi-staged effort of many parts, accepting and culling tactics. Executing strategies within the value chain to maintain a balanced plan to win in the market. While the approaches to risk appetite may be different, the impact of not considering key risk during operation will most certainly lead to decline and failure.
Individual risk appetite matures differently in us as consumers. Individual risk appetite and tolerance differs greatly from an individual’s place in the world. What the individual is born into, what opportunities are available, what challenges they face, and how much responsibility they choose to take on to support their families and loved ones. What seems like a foolish risk to an individual working in a stable white collar job, may be indeed a worthy pursuit to a struggling blue collar laborer in a volatile broken home. It matters to who is judging who here. Risk appetite is also very closely associated with experience and comfort, and unlike enterprise risk management this isn’t done by committee. If you have comfort and stability, rarely is more risk taken on. Doing so almost always ensures a departure of that stability and comfort. It also means that the comfortable individual who chooses not to take a risk will not make a gain if the risk is managed with success. That is the story of founders and builders in many great public companies represented in the global markets today.
At CLIMB, we view risk appetite holistically as a way to reach new plateaus in risk management. Risk appetite isn’t about designing products to hold back the animal spirits in the market or dangle carrots over the consumer. It is very much about alignment. Alignment of risk tolerance both for the enterprise and the consumer. There is no one size fits all, for that reason we designed risk to be modular. Doing so empowers the entire eco-system, the creditor and the borrower. By finding new ways to understand risk it can lead to reaching credit worthy capital deployment and increase credit utilization efficiency in our communities. The carry forward here is a step in redefining financial equality and inclusion. As modern finance looks to build for future the safe bet is to better understand risk. Risk that recognizes the right potential and risk that explains the areas necessary for users to cleanup. Those teams who yield the right technologies in risk better stand to building lasting longevity by reaching achievement together with the client.