'Holistic' approach to risk management

Maybe financial service companies should re-evaluate structures

Financial services companies should re-evaluate their risk management structures in favor of a more practical and holistic approach, according to a new report published recently by PricewaterhouseCoopers and the Economist Intelligence Unit (EIU).

Taming Uncertainty: Risk Management for the Entire Enterprise highlights the range of risks facing financial institutions, from high to low probability and from the quantifiable to the intangible. The report also provides an insight into what industry leaders are doing to ensure they understand the risks they face, and to align their risk management strategy with their corporate objectives.

Juan Pujadas, leader of the global financial risk management practice, PricewaterhouseCoopers said, "There can be a tendency for risk to be concentrated into stand-alone silos. Many banks split risk into three deceptively neat areas of credit, market and operational risk, for example, and set up departments to deal with each, rather than accepting that may of these risks are interlinked.

A comprehensive and integrated view of risk, and a dynamic process for managing risk, are essential components of a leading-edge risk management ca abilitv."

A number of factors need to coalesce in order to create the right framework for holistic risk management:

- Board level management must seize the risk management agenda and make risk management a strategic priority.

- Management processes need to be set up to ensure that an awareness of risk informs corporate governance, decision-making, external reporting and compensation.

- The right enablers - the people and systems that facilitate risk management decisions - must be put in place to deliver the information upon which managers can base their decisions.

Pujadas adds, "In an environment where risks permeate every aspect of the enterprise and where low probability, high impact events are grabbing headlines with increasing regularity, ignoring them is not an option. A regular and objective assessment of a company's own internal risk management framework and increased attention to the risks created through dealings with other institutions, whose risk management structures may not be as robust, are crucial."

As part of the study, PricewaterhouseCoopers identifies 10 attributes of a world-class risk management culture:

1. An awareness of risk and the need to manage it pervades the enterprise.

2. Risks are identified, reported and quantified to the greatest possible extent.

3. Equal attention is paid to both quantifiable and unquantifiable risks.

4. Risk management is everyone's responsibility and is not fragmented into compartments and silos.

5. Everyone involved in monitoring risk, even non-financial risk, has a power of veto over new projects they consider too risky.

6. The enterprise avoids products and businesses it does not understand.

7. Scenario planning embraces uncertainty and factors all possible developments into decision making

8. Risk managers are monitored. Internal audit procedures ensure that systems are running properly and the right results are being reported.

9. Risk management is recognized as a key contributor to value creation.

10. The risk culture is defined and enshrined to give managers and employees the requisite freedom of maneuver to deliver long-term growth and value.

Jeremy Scoff, global head of financial services at PricewaterhouseCoopers said, "The prize that awaits leading risk managers is not simply an avoidance of losses but more importantly, increased shareholder value.

Chief executives who understand risk when making strategic decisions and who clearly communicate their risk appetite inside and outside the company have the best chance of striking the right balance between risk and reward which is fundamental to value creation and profitable growth."