risk appetite

11月 082012

Recent Trends in Risk ManagementFor several years, SAS and “The Banker” have conducted an executive thought leadership program for enterprise risk management. I have been fortunate enough to participate in Sydney leg of this multi-city program. Al Sim, Senior Director at SAS, has attended all the events in the program and has gained a unique insight into the recent trends in risk management.

According to Sim, there are three key common themes influencing current best practice in measuring and managing risk:

  • Enterprise– from a risk management perspective this means bringing together all the risk types (Market, Credit, Operational, Liquidity, Reputational, Strategic, etc.) to enable The Board to:
    • get a complete picture of the organisation’s total exposure to risk and
    • monitor that exposure against The Board’s stated risk appetite.

Taking an enterprise view of risk across a very large combination of information allows The Board to augment expert judgment on critical business decisions and a realistic measure of capital performance. It also provides a dynamic view of enterprise risk that enables the ability to react to various market shock events with more precision, and to potentially take advantage of the market shocks and look for better arbitrage opportunities.

This theme includes the issue of ‘big data’ which also feeds into the next theme.

  • Volatility – over the last 4 years financial markets have witnessed unprecedented levels of volatility (the global financial crisis, Dubai World, Japan earthquake and tsunami, Arab spring, MF Global, Eurozone debt crisis) with prices and market conditions changing very quickly both day-to-day and intraday. This high level of volatility is driving the need to improve the granularity, timeliness and accuracy of risk limits, exposures and liquidity measurement and reporting to key decision-makers to enable organisations to execute fact-based risk decisions in a timelier manner, particularly market risk.

Innovative technology (High Performance Analytics), not been previously available, is bringing to the financial services industry new ways of managing risk in a highly volatile environment. Moving to a high-performance analytics environment enables the organisation to assess risk in a major transaction before doing it – giving the organisation a chance to decide whether the transaction is worthwhile.

  • Communication & Culture– clear lines of communication between the risk function, senior management & The Board is absolutely vital in effectively managing risk in today’s volatile environment. While communication is frequently noted as a challenge for risk managers, Sim noted that CROs who have stepped up to play a more strategic role tend to have an easier relationship with The Board. This reflects the changing dynamic between The Board and the CRO over the last 4 years, particularly as the role of the CRO has dramatically changed to become much more strategic. The right culture (emphasised by “tone from the top”) is also absolutely vital in effectively managing risk in today’s volatile environment. Risk management can only be successful if there is a strong risk aware culture driven from the top, supported by:
    • Clearly defined risk appetite, translated into limits and specific direction for all divisions, units and teams across the organisation;
    • A set of guidelines and expectations from the top down on appropriate risk taking and decision making; and
    • Effective communication up and down the organisation.

In the following video, Silvia Pavoni, Investment Editor for “The Banker,” interviews Al Sim, Senior Director at SAS, to discuss the recent trends in risk management and the best practice approaches this program has uncovered.


tags: big data, High Performance Risk, Risk Appetite, Risk Management
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