RISK MANAGEMENT TECHNIQUES AND STRATEGIESPRESENTED BY
VALDA FREDERICA HENRY, PhD, CFA, GPHR
FOR THE
9TH ANNUAL GENERAL MEETING & CONFERENCE
OF THE
CARIBBEAN ASSOCIATION OF AUDIT COMMITTEE MEMBERS INC (CAACM)
JUNE 11, 2015
SANDALS GRANDE, ANTIGUA & BARBUDA
OUTLINE
Role of the Board in Risk Management
Role of Audit Committee
Definition of Risk Management
Changing Face of Risk Management
Enterprise Risk Management
Tenets of Risk Management in the Banking Industry
Emerging Risks for Banking Sector
EPIGRAPH
If a bank is serious about risk management, then it will be serious from the top down,” (ATKearney, 2013)
ROLE OF THE BOARD IN RISK MANAGEMENT
Identify
Measure
Monitor
Control
Verify different risks within the banking industry
ROLE OF THE AUDIT COMMITTEE
UK Combined Code sets out main roles: Monitor financial statements
Review internal financial controls
Review internal control and risk management system
Monitor internal audit function
Review engagement and remuneration of external auditors
Review and monitor independence and objectivity of external auditors
PRACTICAL EXERCISE – ROLE OF AUDIT COMMITTEE (10 minutes)
On a scale of 1-5, rank the performance of your Audit Committee on these dimensions: Monitors financial statements
Reviews internal financial controls
Reviews internal control and risk management system
Monitors internal audit function
Reviews engagement and remuneration of external auditors
Reviews and monitor independence and objectivity of external auditors
Reviews compliance with relevant laws, regulations, prudential guidelines and by-laws
Reviews ethical conduct of the board, management and staff
PRACTICAL EXERCISE - ROLE OF AUDIT COMMITTEE II
On a scale of 1-5, rank the performance of your Audit Committee on these dimensions: Reviews controls with respect to the management of conflict of
interests of directors, managers and employees
Manages the whistleblowing process
Reviews pending legislation
Reviews and Manages cases of fraud
Conducts environmental scans and impact on the organisation
Reviews efficiency of operations
Reviews outcome of projects against the stated objectives
Reviews its performance annually
CHALLENGES FACING THE BANKING INDUSTRY
The “New Wave” Criminal Effecting cultural change More stress testing Dealing with heightened regulatory scrutiny Facing another economic downturn (Banking Tech, 2015) Bank funding, liquidity and collateral management remains a
concern Regulatory changes around the globe are introducing new strategic,
operational and potentially systemic challenges Cybersecurity and other geopolitical risks present unique oversight
challenges Economic and market conditions continue to pose short and long-
term risks (Ernst & Young, 2012)
DEFNITION OF RISK MANAGEMENT
Definition of risk The uncertainty that surrounds future events and outcomes.
Risk Management The systematic application of management policies, procedures, and
practices to the tasks of analyzing, evaluating, controlling, and communicating about risk issues. (Canadian Standards Association, 1997)
Enterprise Risk Management (ERM) A process, effected by an entity’s board of directors, management
and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives. (COSO)
PRACTICAL ACTIVITY – RISK DEFINITION - GROUP WORK (15 minutes)
How do you define risk at your organisation?
What are the similarities?
What are the differences?
What are the implications of the differences?
Driving Forces Behind the Evolution of Risk Management
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Stakeholders
Demand that management adequately identify all material risks that impact cash flow, capital and mission
Auditors
Current protocols require organizations to report risks in a forward-looking context
Activists
Secular business andnon-business activities – treatment of people, animals, …
Market and Credit Analysts/ Rating Agencies
Require that management strengthen its risk disclosure capabilities
Investors
Demand increased financial disclosure and transparency
Regulators
Increased interest in compliance and approval processes
The Company
ELEMENTS OF ENTERPRISE RISK MANAGEMENT
Aligning risk appetite and strategy
Enhancing risk response decisions
Reducing operational surprises and losses
Identifying ad managing multiple and cross enterprise risks
Seizing opportunities
Improving deployment of capital
PRACTICAL EXERCISE – ERM IN PRACTISE (30 minutes)
Using the COSO Framework, conduct a risk assessment of your organisation?
What new risks were identified during this exercise?
Were any black swans identified?
HOLISTIC RISK MANAGEMENT – ANOTHER LOOK AT RISK
Holistic risk management is a concept about managing all the risks simultaneously, where risks are considered holistically rather than independently. It is all about accountability (Chibayambuya, 2007)
LAM’S HOLISTIC RISK MANAGEMENT STRATEGIES
Know your business
Establish checks and balances
Set limits and boundaries
Keep your eye on the cash
Use the right yard sticks
Pay for the performance you want
Balance the Yin and the Yang (Chibayambuya, 2007)
KLOMAN’S RISK MANAGEMENT FRAMEWORK
All risks emanate from global risks. The global risks are the drivers of the organisational
risks facing the banking industry and includes: Political fragmentation Pandemics Nuclear proliferation Religious fundamentalism Population explosion Climate change
RISK MANAGEMENT TECHNIQUES
SWOT Analysis
PESTLE Analysis
Risk Mapping
Strategic Planning
Monitoring and Evaluation Systems
RISK MAPPING
In a risk map, an organization’s risk are plotted along two dimensions, risk frequency and risk severity. It
permits the capture of a visual image of the key risks facing the firm.
resulting risk map will help in the development and prioritization of available risk mitigation and financing strategies.
25
TOOLS FOR BUSINESS RISK ASSESSMENT
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Key Risks• Critical risks that potentially
threaten the achievement of organization’s objectives
• Lower likelihood, but could have significant adverse impact on organization objectives
• Significant monitoring not
necessary unless change in classification
• Periodically reassess
Lesser significance, but more likely to occur
• Consider cost/benefit trade-off
• Reassess often to ensure changing conditions (move to key risks)
LikelihoodAlmost Certain
Rare
Impa
ct
Low
High
PRACTICAL EXERCISE – RISK MAPPING (15 MINUTES)
Map the risk identified in the ERM Exercise earlier
Has the mapping confirmed the key risks and black swans identified earlier?
What course of action do you plan to take when you return to your organisation?
CONCLUSION
Risk Management is everyone’s business
A holistic, enterprise-wide view of risks provide a more comprehensive analysis of the risks of an organisation
A risk management approach fosters accountability
Audit Committees have a key role to play in the identification, management and control of risks in an organisation
BIBLIOGRAPHY
ATKearney (2009) “Seven Tenets of Risk Management in the Banking Industry,” ATKearney
Banking Act, Dominica 2015
Banking Tech (2015) “Challenges for the Banking Industry in 2015,” Banking Technology
Chibayambuya J & DJ Theron(2007) “The Application of Holistic Risk Management in the Banking Industry” University of Johannesburg
Committee of Sponsoring Organisations of the Treadway Commission (COSO) (2004). “Enterprise Risk Management – Integrated Framework, COSO
Economic Intelligence Unit (2011) “Too Good to Fail? New Challenges for Risk Management in Financial Services,” The Economist
Ernst & Young (2012) “Top and Emerging Risks for Global Banking,” Ernst & Young
Financial Action Task Force (2014) “Guidance for a Rsk0Based Approach – The Banking Sector,” FATF
KPMG (2009) “Never Again? Risk management in banking beyond the credit crisis,” KPMG INTERNATIONAL.
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