Embedding Rm In Business Strategy

ERM Division - GTBank

Embedding ERM in Embedding ERM in Business StrategyBusiness Strategy

Mobola Faloye,Mobola Faloye,CR O,CR O,

Guaranty Trust Bank PlcGuaranty Trust Bank Plc


O v e r v i e w

Which comes first:

Risk-Managing?

Or

Strategy-Setting?


O v e r v i e w

Which comes first: Risk-Managing or Strategy-Setting?

Which comes first: Chicken or Egg?


O v e r v i e w

BOTH!Effectively integrating risk

management with the strategy setting process enables

management to focus on achieving its expected returns while

controlling its accepted risk exposures.


C E O S u r v e y‘THE ECONOMIST’ (3 Key RM Focus Areas)


C E O S u r v e y‘THE ECONOMIST’ (Communication Improvement)


C E O S u r v e y

PwC ERM Survey – Key Statistics

A. Broken down by country/region, the following percentages of CEOs reported that they are using a formal enterprise wide risk identification system:

ASIA EUROPE SOUTH AMERICA U.S.A. 64% 80% 65% 42% B. Asked whether enterprise risk management will enhance

their ability to take appropriate risks that create value: 44% strongly agree


E R M T o o l s

STRATEGY/RISK INTERPLAY

Strategy

ERM

Objectives Enhance Value Enhance Value Value 1 Create new opportunities

Invest in new business activities that promise gainful returns; expected to exceed capital cost.

Create new opportunities Opportunity/threat identification / mitigation in new activities, price deals to compensate for such risks.

Value 2 Improve performance Increase returns on existing business with better tech, processes, policies, knowledge etc.

Improve performance Measure loss exposure on cash flows. Risk/Reward, aggregated capital, scenario analyses, opportunity costs.

Value 3 Harvest existing value Evaluate, exit non profitable business.

Harvest existing value Market analysis, risk mapping, risk adjusted performance measurement.

Value 4 Align risk-taking with risk appetite Assurance that company is not gambling its future Avoid risk averse behaviour or competitiveness.

Align risk-taking with risk appetite Discipline, focus & control, only take risks equipped to handle, capital adequacy.


E R M T o o l s

Link Between Risk Management and Company Value

Effective Risk Management

Increase predictabilityof earnings & control

downside risk

Decrease expectedtotal cost of risk

Enable more risk taking which

increases earningsupside

Increase value ofcompany


E R M T o o l s

3 MAIN TOOLS FOR RISK EXPERTS


E R M T o o l s

Act Less Like Internal Police; More Like Strategic Advisers


E R M T o o l s

Deploy A Holistic Framework

Market Risk

Credit RiskOperational Risk


E R M T o o l s Incorporate Basel II – 3 Pillars

Pillar 1 Pillar 2 Pillar 3 Minimum Capital Requirements and Regulatory View

Supervisory Review and Evaluation (SREP) and Bank’s Internal Capital Adequacy Assessment Process (ICAAP)

Market Discipline

Quantitative Qualitative Qualitative Calculation of Risk-Weighted Assets and Capital Adequacy, for: - Credit Risk - Market Risk - Operational Risk

Banks’ Self-Assessment of their Risk Management and Capital processes and Supervisory Assessment of Banks’ Risk Management Policies and Processes and Capital - Can Result in Additional Capital Requirement

Mandates Increased Minimum Regulatory Requirements for the Public Disclosure of Risk Information by Banks


E R M T o o l s

Integrating ERM with strategy setting:

1) Risk profile of strategic decisions is evaluated early in the process; leading to a more robust business strategy, and

2) Policies, procedures, measures and monitoring are established and continuously improved; providing assurance to Management and the Board that the company is on target with achieving its expected return while controlling its accepted exposure to risk.


E R M T o o l s

Failure To Incorporate ERM

Informal/reactive evaluation leading to either conservative or exaggerated growth scenarios in building the cashflow model;

CEOs may apply their own subjective perception to the final decision;

Little or no risk adjustment mechanism; Inability to maximise potential for creating

sustainable competitive advantage.


S u m m a r y

Which comes first: Risk-Managing?

OrStrategy-Setting?

BOTH!

So never set strategy without evaluating risk.

Each enhances the other.


S u m m a r y

“For firms to succeed in this increasingly global and competitive marketplace,

risk management must become a state of mind. A systematic and proactive

enterprise-wide approach to managing risks is essential to making risk

management an integral part of the company’s DNA”

ANURAG SAKSENA – Chief Enterprise Risk Officer, Freddie Mac


S u m m a r y

INSTITUTIONALISE RISK MANAGEMENT.

IMBIBE IT AS A

CORPORATE WAY OF LIFE.


S u m m a r y

M A R R Y

RISK STRATEGY

TO CREATE V A L U E

Embedding Rm In Business Strategy

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