You are the Chief Risk Officer (CRO) for a small community bank located in a tow

Question

You are the Chief Risk Officer (CRO) for a small community bank located in a town of about 100,000 people. The institution has one building, which is the bank itself. The bank has a two-lane drive-thru, as well as a walk-up automated teller machine. There are 18 full-time employees and 12 part-time employees. Your job as the CRO is to design a complete risk management program, covering both perspectives of traditional risk management and financial Enterprise Risk Management. Identify and address at minimum ten risks, with at least three each from traditional risk and ERM. You are expected to provide clarity and thoroughness in your explanations, and focus on risks that a business owner/bank manager would need to be legitimately concerned with. Please do not choose trivial examples.

Explanation / Answer

There are mainly seven types of risks viz,

interest rate risk, credit risk, strategic risk, transaction risk, liquidity risk, compliance risk and reputation risk.

Banks in the process of acting as intermediaries are confronted with various kinds of financial and non-financial risks , which are Credit Risk, Market Risk, and Operational Risk etc. Risks are as old as banks themselves. The business of Banking is thus, business of Risk Management. Enterprise risk management (ERM) is a relatively new discipline that focuses on identifying, analyzing, monitoring, and controlling all major risk classes (e.g., credit, market, liquidity, operational risk).. Operational risk management (ORM) is a subset of ERM that focuses on identifying, analyzing, monitoring, and controlling operational risk.

The enterprise risks are all the material risks the enterprise encounters. The main risks of banks are typically market risk , operational risk , credit risk , liquidity risk and business risks. It is important that these are measured and monitored frequently so that the enterprise constantly knows it risks and how these change. It is also important that the risks are prioritized with regard to frequency and severity

Categories of Risk in ERM Plan There is no master list of categories that we can use for our project. It changes from project to project, industry to industry and, company to company. Nonetheless, to get you started in the right direction, below are some broad categories that can be used in a majority of the projects that we may encounter in our life.

1. Internal, 2. External, 3. Environmental, 4. Economic , 5. Political , 6. Market ,7. Process , 8.Third-Party ,9. Business, 10. Operations, 11. Organizational ,12. Infrastructure, 13. Culture , 14.Technology ,15. Human Resources, 16. Legal ,17. Financial,18. Project Management, 19. Security

The risk management process involves:

1. Establishing Context: This includes an understanding of the current conditions in which the organization operates on an internal, external and risk management context.

2. Identifying Risks: This includes the documentation of the material threats to the organization’s achievement of its objectives and the representation of areas that the organization may exploit for competitive advantage.

3. Analyzing/Quantifying Risks: This includes the calibration and, if possible, creation of probability distributions of outcomes for each material risk.

4. Integrating Risks: This includes the aggregation of all risk distributions, reflecting correlations and portfolio effects, and the formulation of the results in terms of impact on the organization’s key performance metrics.

5. Assessing/Prioritizing Risks: This includes the determination of the contribution of each risk to the aggregate risk profile, and appropriate prioritization.

6. Treating/Exploiting Risks: This includes the development of strategies for controlling and exploiting the various risks.

7. Monitoring and Reviewing: This includes the continual measurement and monitoring of the risk environment and the performance of the risk management strategies.

What are limitations of the traditional way of assessing risks? Why do you say ERM systems will soon become the norm for most companies?
It has become increasingly clear that traditional risk management approaches do not adequately identify, evaluate and manage risk. Traditional approaches tend to be fragmented, treating risks as disparate and compartmentalised. These risk management approaches often limit the focus to managing uncertainties around physical and financial assets. Because they focus largely on loss prevention, rather than adding value, traditional approaches do not provide a holistic framework most organisations need to redefine the risk management value proposition in this rapidly changing world.

Under ERM, the focus is on integrating risk management with existing management processes, identifying future events that can have both positive and negative effects, and evaluating effective strategies for managing the organisation’s exposure to those possible future events. ERM transforms risk management to a proactive, continuous, value-based, focused and process-driven activity.

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