F INANCIAL S ERVICES Institute of International Bankers Enterprise Risk Management October 29, 2007.

FINANCIAL SERVICES

!@ #

Institute of International BankersEnterprise Risk ManagementOctober 29, 2007

2

Agenda

Enterprise Risk Management (ERM) Industry Drivers

ERM Framework: Key Elements

Primary Benefits of ERM Programs

Key Considerations for FBOs

ERM Challenges and Critical Success Factors

3

Enterprise Risk Management (ERM) Industry Drivers

Expanding Regulatory Scrutiny and Activism

Increasing Impact of Extreme Events

Increased Risk Interaction

Criminal Indictments

Irrecoverable Ratings

Downgrades

Bigger Fines and Settlements

Irreparable Reputational

Damage

goal

Make Our Business Better

Keep Us Out of Trouble Improved

Risk/Return Decisioning

New Risks to Recognize and

ManageOptimizing Risk-Taking

Capacity

Aggregate Risk Reporting and

Value Management

Linking Strategy to Risk and Optimizing

Use of Capital

Development of Consistent Risk

Appetite

Effective Use of Risk

Mitigation

All too confusing and overdone…

Except when we get in trouble

Must do it…

But how do we do it better?

4

ERM Framework: Key Elements

Ope

ratio

nal

Com

plia

nce

Busin

ess

Prac

tices

and

Sal

es

Suita

bility

Cre

dit

Mar

ket/E

quity

/FX

Prici

ng ri

sk

Stra

tegi

c Ri

sk

New Risk Management Methods and Approaches

Risk Framework & Governance

Aggregate Risk Reporting and Value Management

Risk Linkages

5

ERM Framework: Risk Framework and Governance

Defining the approach/philosophy to risk

Organizational and governance structure― Role of the center, the CRO and risk committees― Role of existing risk silos and infrastructure― Defining risk taking, risk owner, risk champion, controlling,

monitoring, measurement, management, oversight and assurance roles and accountability

― Risk responsibility matrix― Delegation of authority

― Governance, reporting lines and information/reporting

Risk appetite and limit structure

Incentive alignment― Linkages to performance measurement and people effectiveness

Strategic value linkage― Define how risk information will be used in decision making (e.g., pricing, capital allocation)

Ope

ratio

nal

Com

plia

nce

Bus

ines

s Pr

actic

es

and

Sale

s Su

itabi

lity

Cred

it

Mar

ket/e

quity

/FX

Prici

ng ri

sk

Stra

tegi

c Ri

sk




Risk Linkages

6

ERM Framework: New Risk Management Methods and Approaches

Economic Value - Economic Capital/Embedded Value:― Increased focus on risk-adjusted return analysis, capital

planning and risk budgeting ― Provide additional tool for strategic decision including

asset allocation, pricing and performance measurement

Risk identification and assessment methods:― Emerging risks and key risk identification and assessment― Emerging practice to manage non-financial risks― One key challenge: get the buy-in from business units

Convergence of risk controlling activities and risk assessment:― Integration of existing assessment methodologies (e.g., Sarbanes-Oxley, operational, compliance and IT risk

assessment, etc.)

Risk scenarios:― Stress testing and scenario analysis of drivers of risk― Scenarios offer additional dimension for risk analysis, in addition to indicative and predictive measures

Ope

ratio

nal

Com

plia

nce

Bus

ines

s Pr

actic

es

and

Sale

s Su

itabi

lity

Cre

dit

Mar

ket/e

quity

/FX

Prici

ng ri

sk

Stra

tegi

c Ri

sk




Risk Linkages

7

ERM Framework: Aggregate Risk Reporting and Value Management

Ope

ratio

nal

Com

plia

nce

Bus

ines

s Pr

actic

es

and

Sale

s Su

itabi

lity

Cre

dit

Mar

ket/e

quity

/FX

Prici

ng ri

sk

Stra

tegi

c Ri

sk




Risk Linkages

Reporting of ERM:– Effort to aggregate existing risk reporting packages to

develop comprehensive view of risks– Non-financial risks are added to risk reporting– More forward-looking measures help assess potential

impact on organization Limits monitoring and escalation:

– Reporting of limits or other policy breaches– Escalating procedures define roles, authority and accountability

Linkage to strategic decision making process:– Strengthening linkage between risk reporting, performance measurement, and strategy– Making decision based on value creation and/or risk-adjusted performance measures, linking top line

revenues and risk Linkage to tactical decision making processes:

– Strengthening linkage between holistic view of risks and key decision-making processes– Revising new product development, product pricing, investments/asset allocation, credit risk management,

ALM and operational optimization

8

ERM Framework: Risk Linkages

Improve linkage between risk classes and risk organizations:– Alignment of management-level and corporate-level governance

structures– Assign ownership for risk monitoring

Correlation and correlation breakage:– Correlation at the mean or correlation at the tail?– Extreme events show that correlation between risks tend to move towards 1

Integration of risk quantification:– Emerging methodologies to quantify non-financial risks– Integration of risk measures allow linkage between measures of risk silos and overall risk

appetite and tolerance

Ope

ratio

nal

Com

plia

nce

Bus

ines

s P

ract

ices

an

d S

ales

Sui

tabi

lity

Cre

dit

Mar

ket/e

quity

/FX

Prici

ng ri

sk

Stra

tegi

c Ri

sk




Risk Linkages

9

Primary Benefits of ERM Programs

Optimize capital utilization. Links decision making to risk/capital to ensure returns are adequate for risks taken

Enhance accountability about risks by ensuring there is a process to identify, understand and manage significant risks to protect enterprise value

Potential to reduce the number and impact of surprises

Increase transparency about risks, thereby improving credibility with investors and other stakeholders

Address regulatory focus on enterprise-wide risk perspective

10

Key Considerations for FBOs

Status vs. Structure—what must an FHC build in the US?– No prescriptive regulatory requirements– Receptive to what can be shown to “work” in practice– Practical need to invest in local ERM increases with scale/complexity of US operations– Analogous to home-host challenge for regulators

How to avoid redundancy and conflict with HO risk management, legal entity structures and global BU management?

– Ensure comprehensive and timely risk information available locally, since a problem will have to managed here first

– Support global risk governance by providing information upstream

HO oversight a key consideration for US regulators– Local ERM can help ensure effective oversight– Local ERM provides a “window” on entire US risk profile for Fed

Focus on risk information and reporting– Local needs and HO needs will differ

11

ERM Challenges and Critical Success Factors

Visible executive support

Solution that is tailored to company

Focus on better management of risk, not just risk reduction

Need to leverage existing risk processes and minimize complexity

Create and reward transparency

Change Management approach is critical

Recognize and compensate for risk capability, competency and culture

Recognize what gets measured gets managed and vise-versa (don’t remove focus on core risks)

12

E&Y Contacts

Hank Prybylski

Partner and Practice Leader, Global Financial Services Risk Management(212) 773-2823 [email protected]

Christopher Maher

Partner(212) [email protected]

Don Vangel

Advisor, Regulatory Affairs(212) [email protected]

F INANCIAL S ERVICES Institute of International Bankers Enterprise Risk Management October 29, 2007.

Documents

Transcript of F INANCIAL S ERVICES Institute of International Bankers Enterprise Risk Management October 29, 2007.