Negotiating the Risk Mosaic: A Study on Enterprise-Wide Risk Measurement and Management in Financial Services. (Executive Summary)

The RMA Journal, March 2003 | Go to article overview

Negotiating the Risk Mosaic: A Study on Enterprise-Wide Risk Measurement and Management in Financial Services. (Executive Summary)


Alden Toevs, Robert Zizka, William Callender, Emil Matsakh

"Enterprise-wide risk measurement and management" entered the business lexicon in the late 1990s. In 2002, 30 leading financial institutions from around the globe joined a study sponsored jointly by the Risk Management Association (RMA) and First Manhattan Consulting Group (FMCG) to agree on a useful definition for enterprise-wide risk measurement and management (EWRM) and then assess each institution's performance vis-a-vis best practices. Selected highlights follow. (1)

Overview of the Study

Senior risk managers of 13 leading financial institutions collaborated with RMA and FMCG to design a comprehenive questionnaire to codify emerging best practices.

The study's scope and focus were guided by three overarching objectives:

1. Determine where the industry is today with respect to EWRM.

2. Identify current and emerging best practices in individual risk types (e.g., credit, operational, market, structural interest rate, and business risks. (2)

3. Speculate on how EWRM may evolve.

Early in the effort, the group drafted a working definition of EWRM:

"A holistic approach to measuring and managing major risk types based on their simultaneous consideration (and interrelationships where appropriate), thus allowing an institution to understand and adjust its risk exposures in an overall risk/reward framework."

PeerGroups Defined by EWRM Sophistication

Risk measurement and risk management go hand in hand. The term "measurement was assigned to cover the requisite identification of types of risk and the data, analytics, and tools used to quantify risk across an organization using a common currency or metric whenever possible. "Management" was used to cover organizational approaches, policies, procedures, and decision making used to influence or alter the risk positioning of an institution.

To draw out consistent "themes" on the industry's state of play in EWRM, the survey respondents were segmented based on a "scorecard" of approximately a dozen higher-level risk measurement and management questions from the survey (see Figure 1). Out of this process three peer groups emerged: Leaders, Semi-advanced, and Traditionalists.

It is important to note that the survey participants as a group could all be characterized as advanced when compared to the entire universe of their peers. Figure 2 on the following page provides an illustration of this point: almost 90% of the survey participants already have, or plan to have, a separate credit portfolio management unit.

The scorecard in Figure 1 shows how participating institutions fared in measurement and management dimensions. Twelve fall into the leadership category--defined as being advanced in either measurement or management while, at a minimum, meeting the standard definition of the other--3 of the 12 scored as truly advanced in terms of both risk management and measurement. (There are 9 "Semi-advanced" and 7 "Traditionalists"--these 16 are collectively referred to as "Strivers.")

Consistency Across Segments

Leaders are more apt to self-assess their progress conservatively as compared to Strivers: This finding suggests that those who have made the most progress best understand just how much there is left to do.

One notable finding was that the segmentation scheme based on a dozen or so questions yielded peer groups with largely cohesive practices within each group. Over the more than 300 questions in the survey, peers in each group most often answered similarly to one another, but differently than institutions in other peer groups. Thus,

1. Leading institutions share basic characteristics in their measurement methodologies and management practices.

2. Although EWRM is a complex evolutionary process, financial companies can ask themselves a limited number of questions to self assess their relative aptitude. …

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