Key Trends in Risk Management
UNTIL RECENTLY, FINANCIAL regulators worldwide operated largely under the assumption that the internal risk management processes at most financial and trading firms was effective and there was little need for micro-management. We recently argued that for the risk management process to be effective, a firm needs to have an explicit ‘risk governance’ framework in place that integrates risk management into the governance structure of the firms, and coherently links the roles and responsibilities of the risk group with the overall business strategy of the firm.1
In this context, the role of the Chief Risk Officer (CRO) and
the risk management team have a clear mandate – become more effective in managing risk and add value by being more proactive to the overall risk approach. The risk management group today needs to address the growing needs of global organisations and meet the heightened expectations of investors, board members, and regulators. Based on their engagements with several large
organisations, MetricStream has observed five key trends for managing operational risk, compliance risk and enterprise- wide risk.
Federated Approach to Risk Management
This is a move away from siloed world, wherein most business units and functions within a bank are essentially working independently in total isolation with little or no collaboration happening between them. This is all changing rapidly and a lot has to do with the recent regulatory reforms. The complexities and the business challenges created by the regulations demands that different business functions are deeply integrated and collaborated in their approach to analyse aggregated data and take collective decisions. In the federated structure, the enterprise risk function is aligned centrally with corporate governance and reporting but is also distributed to lines of business that facilitates ownership and accountability for risk.
Real-Time Risk Intelligence As part of better risk governance, one trend is the
proactively addressed, such risks can be devastating, not because these cannot be mitigated or managed, but because the organisation lacked a clear framework to even identify these risks. To be better prepared, most financial organizations are building their ability to monitor and detect key emerging risks as part of their overall risk management efforts. Organisations are taking a fresh look at their risk management processes and allocation of resources to ensure that emerging risks are effectively identified, assessed, and managed from strategic planning all the way down to day-to-day processes at all levels of the organization. Risk analytics and reporting is further strengthened to provide insights on emerging risk trends and provide real-time intelligence on them.
Organisational Structure: Clear Accountability & Increased Transparency Today’s environment calls for greater collaboration
and strong relationship between the risk committee and the business unit. The trend therefore is moving towards developing a risk governance structure that facilitates a healthy environment and collaboration. This encourages the free flow of information regarding any issues or concern between the business unit and the risk team. The organization has to be structured in a way that facilitates accountability i.e. not limited to only the Risk Committee. The business units are also getting aligned to derive maximum value out of the centralized risk committee. This ensures that there is clear accountability and increased transparency in the entire risk management process.
Upgrading Risk Infrastructure Most financial institutions are upgrading the technology
infrastructure used to manage enterprise-wide risks. Companies are migrating from their legacy systems, point applications and paper-based procedures to web-based integrated enterprise risk management system.
need for increased and well structured risk information getting to the Board and its Risk Committee. They are actively seeking comprehensive and real-time risk intelligence that provides information and analysis on key emerging risks, not just financial risk such as credit or market risk. The risk intelligence must provide comprehensive and well structured information ensuring that key risk trends are appropriately highlighted and that risk appetite is well within the defined limits. Institutions also seek more granular data to remain in competition and to better price their products and services. All this information needs to flow on a real-time basis such that appropriate action may be taken on a timely basis.
Monitoring & Managing Emerging Risks Emerging risks, although systemic in nature, have such
significant impact on the organization that it can no longer be ignored. Financial Institutions have found that, if not
... most financial organisations are building their ability to monitor and detect key emerging risks
Technological advancement allows the CRO to streamline
and strengthen the risk management function enabling it to deliver more strategic value while lowering its costs of operation. Expected benefits are better enterprise-wide visibility, a transparent and collaborative environment and data-driven decision making. Solution and tools available today provide a reliable means to monitor access controls, observe the closed-loop processes and analyse important data and key risks. •
MetricStream is a market leader for enterprise Governance, Risk and Compliance solutions.
www.metricstream.com
Footnote 1. A Risk Governance Model, Carlos Blanco & José Ramón Aragonés, Commodities Now, September 2010.
September 2011 45
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