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Financial Risk Management (FRM File 007)- Implementing Firm-wide Risk Management

Financial Risk Management (FRM File 007)
Implementing Firm-wide Risk Management



Firmwide risk management entails a significant commitment of time and resources. It requires a focus on the central businesses of a firm, bottom-to-top review of lending or origination, trading or market making, and intermediation with a risk management perspective. It leads to the construction of databases and reporting systems quite different from standard accounting systems. In this process, there are some guiding principals for successful implementation:

First, risk management must be integral to an institution’s business plan. Decisions to enter, leave, or concentrate on an existing business activity require careful assessment of both risks and potential returns. A firm must define risk management practices for each business activity it pursues. It must eliminate those activities not part of its focus so that it does not assume avoidable risks because of a lack of management oversight.


Second, a firm must define the specific risks of each activity and develop ways to measure them. Similarly, it must develop databases to measure risk consistently across the entire organization.Credit risk evaluation techniques, for example, should be the same in corporate lending as in correspondent banking. Only then will aggregate credit quality reports have meaning for senior management.


Third, a firm must establish procedures so that risk management begins at the point nearest to the assumption of risk. This means it must adapt trade-entry procedures, customer documentation, client engagement methods, trading limits, maximum loan sizes, hedging strategies, and a myriad of other normal activities to maintain management control, generate consistent data, and eliminate needless exposure to risk.


Fourth, a firm must develop databases and measurement systems in accordance with how it conducts business. For example, most accounting systems for trading operations record trades on the basis of settlement day. However, to measure trading-desk risks, risk management systems must record positions on a trade-date basis, which means that the risk management system must access the trade-entry system directly. Moreover, for accurate daily reports, trades must be recorded, entered, and checked frequently. Next-day corrections of bad trade information are not timely enough.


Finally, none of these procedures or databases are effective or meaningful until the firm establishes an overall risk management system that senior managers use.23 It must use the system to evaluate businesses, individual performance, and its value added. The system must be the ongoing focus of management analysis and discussion and, over time, become part of board meeting presentations. To achieve this, the business units being monitored must check risk reports regularly and tailor reports for their users. The system must be part of management’s oversight, control, and compensation.







Written by Dr. Chao Yuang Shiang
Faculty, Dep. of Finance, Nan Hua university


趙永祥 博士
(南華大學財務金融學系暨財務管理研究所 專任助理教授)


19-August-2017

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趙永祥  博士 (Dr. Chao Yuang Shiang)




       
凡事唯有投入,結果才能深入; 凡事唯有付出,結果才能傑出;
凡事唯有磨鍊,結果才能熟練; 凡事唯有不煩,結果才能不凡。
能與智者同行,你會不同凡響; 能與高人為伍,你能登上巔峰。
你雖不能改變環境,但卻可以轉換心境;你雖不能樣樣勝利,但卻可以事事盡力。
Dr. Chao Yuang Shiang (PH.D in management), Assistant professor,Dep.of Finance,Nanhua University,Taiwan.
website:amazon.com/author/drchao
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