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  Issue 1 | Archive   16 November 2009

Strategic Risk Management in Practice

By THAM Ming Soong, Executive Vice President and Head of Risk Management, United Overseas Bank

Risk management practice in many organizations today is a silo-based approach; the practice is largely driven by supervisory or regulatory requirements such as the Basel II. However, we do see that the changes in the external risk environment have led to financial institutions taking an enterprise wide approach to risk management known as Enterprise Risk Management (ERM).

ERM is not the adoption of an integrated quantitative risk model or a solution provider to issues pertaining to capital. It is instead a risk-based approach to managing an organization to minimize the effects of risk on an organization's capital and earnings. This essentially involves incorporating financial management, strategic planning, operations management, and internal controls which enables the provision of a unified risk picture and improving the ability to effectively manage risks.

For effective implementation of an ERM Framework certain principles and philosophies should be adhered to such as -

  • Espousal of sound risk management principles and sound business practices to promote sustainable long term growth
  • Continual improvement of risk recovery capabilities and establish appropriate risk controls in value creation
  • Focus on facilitating business development within a prudent, consistent and efficient risk management framework that balances risk and returns

To enhance business growth and shareholder value it is imperative that there be a risk management governance framework in place. The goals and strategies of the organizations must be aligned to move towards effective risk awareness and management.

ERM Framework should aim to:

  • Inculcate a strong risk culture interdependency among management, business units, support units, and risk and control functions
  • Be forward looking and value creating framework such that it enables efficient capital allocation, risk discovery and effective pricing with the:
    • Establishment of practice standards across all operating environments
    • Congruent risk methodologies
    • Effective infrastructure enabling effective risk monitoring
  • Make capital allocation an interactive process through interlinking
    • Strategic Planning - Set initiatives and revenue targets
    • Business Units - Develop Tactical Initiatives to achieve revenue targets
    • Risk Management - Set Risk parameters and perform enterprise wide scenario analyses
    • Capital Management- Assess capital adequacy and mange the capital structure
  • Risk discovery through improving data infrastructure to enhance quantitative and qualitative analytical capabilities
  • Provide training and exposure to build internal talent pool to ensure continuity

Building and implementing ERM Framework will not be an easy task and indeed costly. The organization is likely to face challenges related to mind set change, data availability and quality, as well as computational capacity. The lack of experienced risk managers raises the need to develop the appropriate competencies. To overcome the aforementioned challenges it is necessary to change mind sets, and encouraging creative thinking to move beyond just quantitative models.

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