Question

most traditional ERM programs struggle to integrate ERM into decision making.

Is this statement true? Why?

Answer 1

Most traditional ERM(Enterprise Risk Management) programs struggle to integrate ERM into decision making. This statement is true to a certain extent because of the following reasons:-

1. Appropriate risk metrics are not used effectively. For example, VAR(Value at Risk) can only tell us about the largest loss that can happen at a defined confidence interval, but not about the distribution of losses. Hence, it cannot guarantee the success in case decision is made.

2. The correlation held between the positions held by a financial institution may be mis-measured by the risk manager, especially when the number of positions are very high.

3. It is difficult to capture all the changes in the risk characteristic of securities when it changes rapidly, and hence difficult to hedge the position quickly accordingly.

4. Miscommunication of risk by risk manager to the top management can lead to the board and management making wrong strategic decisions, which can result in more risk.

5. Since the future events cannot be predicted with certainty, it can be costly and very difficult to consider all the risks in the system.