From optimisation to resilience: The changing nature of the risk reward conversation as seen through Westpac's capital and liquidity management policies

Abstract

This paper describes three insights into the use of risk-measurement models that further enhance the risk-management processes at Westpac: (1) Optimisation opportunities apparently on offer from advanced Basel II models led to the formalisation of a robust challenge process for risk models and the recognition that risk-model outcomes are best thought of as hypotheses that should be continually tested; (2) The recognition that stress testing would not capture ‘unknown unknowns’ strengthened consideration of unquantifiable risks; (3) Finally, the experience from the global financial crisis that continual access to wholesale funding markets could not be assumed deepened the understanding of the role risk models play in maintaining market confidence. Each of these insights tilted the emphasis in discussions at Westpac about enhanced risk measurement from optimisation to resilience.