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Enterprise Risk Management – The Benefits of an Integrated Risk Strategy Geoff Kates Chairman, PRMIA Geoff.kates@prmia PowerPoint Presentation
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The Professional Risk Managers’ International Association. Enterprise Risk Management – The Benefits of an Integrated Risk Strategy Geoff Kates Chairman, PRMIA Geoff.kates@prmia.org. Format of Presentation. Defining ERM Using ERM to Inform Risk Appetite Integrating Risk Streams

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The Professional Risk Managers’ International Association

Enterprise Risk Management – The Benefits of an Integrated Risk Strategy

Geoff Kates

Chairman, PRMIA

Geoff.kates@prmia.org

format of presentation
Format of Presentation
  • Defining ERM
  • Using ERM to Inform Risk Appetite
  • Integrating Risk Streams
  • Capital Allocation
  • Delivering ERM
  • Questions?
the purpose of erm
The Purpose of ERM
  • Aligning the entity’s risk appetite and strategies
  • Creating a single language for discussion of risk issues
  • Reducing the frequency and severity of operational shocks and losses
  • Identifying and managing overlapping risks from different business lines
  • Improving the effectiveness of capital allocation
the essence of erm
The Essence of ERM
  • Important that ERM adds value and does not just pay ‘lip service’ to the concept
    • Countrywide’s commitment to ERM much heralded 12 months ago
    • ERM is not about box ticking
  • Aim is to provide valuable information to senior management to enable them to make informed decisions
intertwining risks
Intertwining Risks

ERM is about more than Market, Credit and Operational Risk

Critically can now also provide a framework for the management of liquidity risk

Unified assessment of the bank’s liquidity position

Other risk factors less tangible but just as important to the health of the bank

Reputational risk

Organisation risk

Compliance risk

aligning risk appetite and strategies
Aligning Risk Appetite and Strategies

Fundamental to define and articulate risk appetite appropriately

Conventional risk vs. reward decisions to be taken

Communication of this risk appetite can determine its success

Entire enterprise needs to be ‘risk aware’

ERM does NOT simply provide a ‘risk number’ for the bank

Provides detail and colour to the view of risk

aligning risk appetite and strategies1
Aligning Risk Appetite and Strategies
  • ERM provides the basis upon which to transfer risk appetite into actionable business strategies
  • Holistic risk decisions flow down into business planning
  • Drives awareness of the bank’s wider risk objectives within previously siloed lines of business
  • Front Office acts as a reflection of firm’s risk appetite
creating a universal language for understanding of risk
Creating a Universal Language for Understanding of Risk
  • Risk management previously defined by the complexities of individual risk streams
  • ERM broadens the discussion to allow for consideration of the primary goal i.e. The Enterprise
  • Brings risk streams together to articulate a bank’s risk culture
    • ‘Common objectives through shared awareness’
establishing an effective risk culture
Establishing an Effective Risk Culture

ERM is inextricably linked to risk culture throughout the organisation

The transfer of risk appetite from senior management into the business

Requirement to harness interests of revenue generating staff and align with bank’s overall objectives

ERM delivers a systematic and rigid way of instilling culture

Performed through the ERM process

handling overlapping risks
Handling Overlapping Risks

Past 18 months has forcibly demonstrated that risk factors do not operate independent of one another

Risk factors are inextricably linked

ERM provides a mechanism to assess and manage these overlapping risks

Seeks an understanding of what is driving enterprise risk

Starts with the fundamental – e.g. Market and Credit Risk

Incorporates the less quantitative – e.g. Reputational and Compliance Risk

driving towards an unified approach integration
Driving Towards an Unified Approach: Integration

Integrating market and credit risk seen as an essential first step

Recent events have made this a priority for many

Facilitates effective credit mitigation

Risk management processes then extended to the financial management of the enterprise

Facilitated by the advance of credit derivatives

Assists measurement of volatility of revenues, expenses and asset and liability flows

liquidity management
Liquidity Management

Management of liquidity position enhanced by ERM

No longer considers liquidity in isolation

Liquidity risk becomes a key component of all risk assessment

meta hedging
Meta Hedging

Fundamental role of ERM decision-making is meta hedging

Taking large positions to hedge exposures of whole lines of business during market turmoil

Bear’s move away from this strategy proved extremely costly

ERM should act as a way of reporting to senior management the bank’s various risks

Allows for strategic enterprise-wide decision making

enterprise exposure visualisation
Enterprise Exposure Visualisation

Credit crisis has emphasised value of understanding enterprise exposure

3 weeks to identify true exposure to Bear Stearns

Integration of risk streams and processes allows for near real-time appreciation of enterprise exposure

Dashboard at enterprise level facilitates identification of risk concentrations

Demands extensive data and systems integration and real-time data capture

capital considerations
Capital Considerations

Global enterprises demand global risk policies / processes

Difficulty in aligning global regulation with local enforcement

ERM allows for more effective capital allocation across individual entities

Global banks can make full use of diversification

Ensures adequate allocation at subsidiary level

Capital allocation becomes a dynamic management tool

capital considerations1
Capital Considerations

Base business and risk information assimilated by the enterprise layer

ERM allows for top-down allocation with a full appreciation of the enterprise picture

Risks can be diversified across the entity structure

Entities are capitalised to maximise business opportunities

the mechanism of erm
The Mechanism of ERM

Split in evidence over whether or not a specific ERM function is employed

Some firms pursue ERM philosophies out of Group Risk

Others depend on the CRO to drive enterprise risk thinking and pull together a cohesive enterprise risk picture

ERM also viewed as an educational tool

revising the technology architecture
Revising the Technology Architecture

Technology implications of ERM are complex and burdensome

Involves integrating numerous data sources and cross-functional processes

Need to develop granular drill-down functionality from enterprise level

Enterprise risk visualisation involves converging disparate systems, data, processes and people

Vital that underlying data retains its integrity

All iterative processes and new governance structures are of little use if data is invalid or inconsistent

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Member Support: support@prmia.org

The PRM program: certification@prmia.org