kevin stiroh : emerging issues for risk managers introductory remarks by mr kevin stiroh, executive vice president of the financial institution supervision group of the federal reserve bank of new york, at the garp global risk forum, federal reserve bank of new york, new york city, 7 november 2019. * * * prepared for delivery introduction good morning and welcome to the garp global risk forum. the federal reserve bank of new york has been collaborating with garp on this forum for a decade and it is always a pleasure to participate. this discussion provides real - time insight into critical issues at the center of the practice of risk management. a quick scan of today ’ s agenda highlights a number of topics of obvious importance — operational resilience, cyclical aspects of risk management, technology and big data. we are all thinking about these issues, and i look forward to your insights. i ’ d like to briefly discuss two topics where i expect risk managers will increase their focus in coming years — climate change and the cultural aspects of digital transformation. both issues reflect potentially transformative trends for the economy and the financial system, and i believe they will take an increasing share of your bandwidth over the next decade. in both cases, the relevant questions from a supervisors ’ perspective are : what new risks are introduced? how do firms manage them? and how do supervisors view them? before proceeding, i will emphasize that i am speaking for myself and these views do not necessarily reflect those of the federal reserve bank of new york or the federal reserve system. climate the u. s. economy has experienced more than $ 500 billion in direct losses over the last five years due to climate and weather - related events. 1 in addition, climate change has significant consequences for the u. s. economy and financial sector through slowing productivity growth, asset revaluations and sectoral reallocations of business activity. 2 for these climate - related risks, a new lexicon has emerged. physical risk is the potential for losses as climate - related changes disrupt business operations, destroy capital and interrupt economic activity. transition risk is the potential for losses resulting from a shift toward a lowercarbon economy as policy, consumer sentiment and technological innovations impact the value of certain assets and liabilities. these effects will be felt across business sectors and asset classes, and on the strategies, operations and balance sheets of financial firms. risk managers must be aware of these risks and develop the tools needed to identify, monitor and manage them appropriately. physical and transition risks

- tech firms — will leverage technology and a customer - centric approach to disrupt the industry and outcompete stagnant incumbents, fundamentally transforming the industrial organization of financial services. an alternative, equally extreme view, is that incumbent financial firms with established customer bases, scale, vast quantities of data, and experience working in a regulated environment will “ disrupt themselves ” and maintain their central position in finance. the most likely outcome, as is typically the case, is somewhere in the middle, but change seems inevitable. if all firms face a strategic imperative to innovate and adapt, a relevant question is what types of firm - specific factors will determine success? clearly, things like business model, technological expertise, and resources will matter. i think that firm culture will also matter. 5 and by culture, i mean the values and shared norms within a group that influence individual behavior, collective decision - making and outcomes. as firms innovate and transform how financial services are provided, i expect we ’ ll see the value of leadership from senior managers and boards as they outline the strategic case for change and exhibit the critical behaviors that promote it. i expect we ’ ll see the value of innovative environments where employees speak up, both raising new ideas and questioning assumptions. i expect we ’ ll see the value of cognitive diversity as firms tackle complex problems like a digital transformation from multiple perspectives. i expect we ’ ll see the value of agility that facilitates product innovation, reprioritization, constructive partnerships, or the successful integration of financial market specialists and technologists. finally, i expect we ’ ll see the value of well - crafted incentives where employees are rewarded based on both “ what ” they do and “ how ” they do it. more broadly, i think firms with high levels of “ cultural capital ” will be more likely to successfully implement a digital transformation in a sustainable, prudent and responsible manner. 6 this is a central question for risk managers and supervisors because the evidence suggests that most large - scale transformations fail. 7 just like firms, investors and supervisors consider execution risk when assessing bank mergers, i expect more attention will focus on culture and the change management risks associated with innovation and digital transformation. in my view, the official sector can facilitate this transition. the 2018 guidance on responsible innovation related to anti - money laundering and terrorist financing is a good example. 8 supervisors can also press on the governance and change management framework to promote effective internal oversight. from our perspective, supervisors also need to