Question

briefly explain what you would consider to be an appropriate risk governace structure for a bank intending to introduce an enterprise wide risk management framework

Answer 1

All icompanies iface irisk; iwithout irisk, ithere iis ino ireward. iThe iflip iside iof ithis iis ithat itoo imuch irisk ican ilead ito ibusiness ifailure. iRisk imanagement iallows ia ibalance ito ibe istruck ibetween itaking irisks iand ireducing ithem. i

Enterprise iRisk iManagement i(ERM) iis idefined ias ian iorganization’s iability ito iunderstand, icontrol, iand iarticulates ithe inature iand ilevel iof irisks itaken iin ipursuit iof ibusiness istrategies, icoupled iwith iaccountability ifor irisks itaken iand iactivities iengaged iin. iOne iof ithe imain ibenefits iof iERM iis ian ienhanced iperspective iand ifocus ion irisk imanagement iacross ithe iinstitution.

Effective irisk imanagement ican iadd ivalue ito iany iorganization. iIn iparticular, icompanies ioperating iin ithe iinvestment iindustry irely iheavily ion irisk imanagement ias ithe ifoundation ithat iallows ithem ito iwithstand imarket icrashes.

1. Risk iis ia ireality ifor ibusiness iowners iand imanagers iregardless iof ithe iindustry isector ior isize iof ithe icompany.

2. Well-run icompanies iwill ihave ia icomprehensive irisk imanagement iframework iin iplace ito iidentify iexisting iand ipotential irisks iand iassess ihow ito ideal iwith ithem iif ithey iarise.

3. Risk iidentification, imeasurement, imitigation, ireporting iand imonitoring, iand igovernance iare ithe isix ikey ipieces iof ian ieffective iframework.

Enterprise irisk imanagement i(ERM) iin ibusiness iincludes ithe imethods iand iprocesses iused iby iorganizations ito imanage irisks iand iseize iopportunities irelated ito ithe iachievement iof itheir iobjectives. iERM iprovides ia iframework ifor irisk imanagement, iwhich itypically iinvolves iidentifying iparticular ievents ior icircumstances irelevant ito ithe iorganization's iobjectives i(threats iand iopportunities), iassessing ithem iin iterms iof ilikelihood iand imagnitude iof iimpact, idetermining ia iresponse istrategy, iand imonitoring iprocess. iBy iidentifying iand iproactively iaddressing irisks iand iopportunities, ibusiness ienterprises iprotect iand icreate ivalue ifor itheir istakeholders, iincluding iowners, iemployees, icustomers, iregulators, iand isociety ioverall.

i i i i i i iThere iare ivarious iimportant iERM iframeworks, ieach iof iwhich idescribes ian iapproach ifor iidentifying, ianalyzing, iresponding ito, iand imonitoring irisks iand iopportunities, iwithin ithe iinternal iand iexternal ienvironment ifacing ithe ienterprise. iManagement iselects ia irisk iresponse istrategy ifor ispecific irisks iidentified iand ianalyzed, iwhich imay iinclude:

1. Avoidance: iexiting ithe iactivities igiving irise ito irisk

2. Reduction: itaking iaction ito ireduce ithe ilikelihood ior iimpact irelated ito ithe irisk

3. Alternative iActions: ideciding iand iconsidering iother ifeasible isteps ito iminimize irisks

4. Share ior iInsure: itransferring ior isharing ia iportion iof ithe irisk, ito ifinance iit

5. Accept: ino iaction iis itaken, idue ito ia icost/benefit idecision

Monitoring iis itypically iperformed iby imanagement ias ipart iof iits iinternal icontrol iactivities, isuch ias ireview iof ianalytical ireports ior imanagement icommittee imeetings iwith irelevant iexperts, ito iunderstand ihow ithe irisk iresponse istrategy iis iworking iand iwhether ithe iobjectives iare ibeing iachieved.

i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i iThe igovernance iframework iprovides ia imechanism ifor isenior imanagement, ias iwell ias ithose iat ithe ioperational ilevel, ito ihave ia iclear iunderstanding iand ioversight iof ieach iother's iexpectations, iobjectives, iperformance, irisk iappetite, iand ireporting irequirements. iIn iaddition, ithat ithese iaspects iare ieffectively icommunicated ito irelevant ipersons iin ithe iorganization. iThus, ithe igovernance iframework iis ia i“guidance isystem icomposed iof istandard imanagement ipractices iwithin ithe igovernance iframework idesigned ito isuit ithe iorganization”.

The ibusiness iof ibanking iexposes ithe iorganization ito ia iwide ivariety iof irisks. iThe iERM iframework iis idesigned ito isupport ithe idepth iand ibreadth iof iactivities iby iproviding ia istructured iapproach ifor iidentifying, imeasuring, icontrolling, iand ireporting ion ithe isignificant irisks ifaced iby ian iorganization.

i i i i i i i i i i i i i i i i i i i i i i iEnterprise irisk imanagement i(ERM) iis idefined ias ian iorganization’s ienterprise irisk icompetence ithe iability ito iunderstand, icontrol, iand iarticulate ithe inature iand ilevel iof irisks itaken iin ipursuit iof ibusiness istrategies icoupled iwith iaccountability ifor irisks itaken iand iactivities iengaged iin. iOne iof ithe imain ibenefits iof iERM iis ian ienhanced iperspective iand ifocus ion irisk imanagement iacross ithe iinstitution. i i

i i i i i i i i i i i i i i i i i i i i i i i i i i i i iThe ibasic iconcept iof ienterprise irisk imanagement ihas ibeen iapplied, imore ior iless, iin iseveral iindustries ifor iwell iover ia idecade. iThe ichanging iregulatory ienvironment, ieconomic iturmoil, iand igrowing icomplexity iof iproducts, itools, iand irisks ihas, iamong iother iinfluences, ihelped ito ilaunch ithe ipractice iof ienterprise irisk imanagement iinto ithe ifinancial iservices iarea. iIn ithis irespect iERM iin ithe iworld iof ibanks iand ifinancial iinstitutions iis ivery imuch iin iits iearly idevelopment, ithough imuch iprogress ihas ibeen imade.