Business Focus; the Imperatives of Developing an Enterprise-Wide Risk Management and Governance Framework (Part 2)

Manila Bulletin, June 21, 2004 | Go to article overview

Business Focus; the Imperatives of Developing an Enterprise-Wide Risk Management and Governance Framework (Part 2)


Byline: LEONARDO B. ARANETA

In an earlier column, we discussed major developments that heightened the need among financial institutions to institute measures to mitigate and manage risk.

How can a Philippine financial institution, specifically, a bank, develop an enterprisewide risk management and governance framework for global competitiveness?

The answer rests on the Three-Pillar Framework proposed by the Basle II Accord:

1. Minimum Capital Requirement

This requirement aims to propose a new standardized approach which bases the default risk weights on available external credit ratings. The main concern here is: Are external credit ratings available in the Philippines?

As an alternative, Basle allows sophisticated banks to use their own internal credit ratings. The basic issue here is: How reliable are the internal credit rating systems of Philippine banks?

2. Supervisory Review Process

This will ensure that banks follow rigorous processes, measure their risk exposures correctly, and have enough capital to cover their risks. This becomes an opportunity for the Bangko Sentral ng Pilipinas to further ensure the strength and integrity of the Philippines financial system.

3. Market Discipline

This can be used as a lever to strengthen the safety and soundness of the banking system through better disclosure of capital levels and risk exposures. This will help market participants to better assess the banks ability to remain solvent.

This particular pillar is very much related to the provisions of the Sarbanes-Oaxley Act (discussed on our earlier column) in that it entails an enhanced financial disclosure and the use of Non-GAAP financial information. This calls for a more transparent operation.

In most financial and non-financial organizations, specifically in North America, the development of an enterprise-wide risk and governance framework is part and parcel of a firms corporate identity, culture and survival. This framework guides its risk-taking activities and ensures that these are aligned with clients needs and shareholder expectations. And this can be used as reference by Philippine companies as well.

The framework is applied across all of risk management activities. It involves the management of risks on an integrated basis as well as direct management of credit, market, liquidity, funding, and operational risks.

The most important aspect of this framework is that it is built on the following critical elements:

1. Comprehensive Risk Governance

The risk governance structure is designed to ensure that the company has a strong and wellinformed risk culture geared towards making sound business decisions that balance risk and reward. …

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