Enterprise Risk Management (ERM) Integrating Strategy, Capital and Risk GARP 2008 Enterprise Risk Management Workshop Presented by: Joe Rizzi CapGen Capital February 28, 2008 The views expressed are those of the author and do not necessarily reflect those of CapGen Capital
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Enterprise Risk Management (ERM) Integrating Strategy, Capital and Risk
Enterprise Risk Management (ERM) Integrating Strategy, Capital and Risk. GARP 2008 Enterprise Risk Management Workshop Presented by: Joe Rizzi CapGen Capital. February 28, 2008. The views expressed are those of the author and do not necessarily reflect those of CapGen Capital. - PowerPoint PPT Presentation
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Enterprise Risk Management (ERM)Integrating Strategy, Capital and Risk
GARP 2008 Enterprise Risk Management Workshop
Presented by: Joe RizziCapGen Capital
February 28, 2008The views expressed are those of the author and do not necessarily reflect those of CapGen Capital
2CapGen Capital
Table of Contents
Enterprise Risk Management2
Current State of Risk Management1
Enterprise Risk Management at BU NA3
Integrating Strategy, Capital and Risk4
Conclusion5
3CapGen Capital
OverviewImportance of Risk Management is driven by four key forces
Risk Management
Complex and VolatileBusiness Environment
ShareholderExpectations
CompetitiveRivalry
RegulatoryEnvironment
Risk Management lies somewhere between astrology and alchemy
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Attitudes, Values and Objectives
Out with the old...
Line of Business
My job is: To grow earnings / do business
Risk is: A normal cost of doing business
Memory horizon: Short-term: What are the prevailing market conditions?
Stereotypical attitude: No risk, no return. Don’t handcuff me relative to the competition
Metrics: Volume in front-line positions; Profit for senior positions
Risk Management
My job is: To prevent losses/risky activity
Risk is: Volatility to be avoided
Memory horizon: Long-term: What’s the worst thing that has ever happened?
Stereotypical attitude: ‘The Cautious Librarian’: best way to keep books from being damaged is not to let anyone borrow them Metrics: Volume in front-line positions; Profit for senior positions
Business focuses on the center, while Risk Management focuses on the tails of the distribution
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Attitudes, Values and Objectives
...and in with the new.
Partnership
Our job is: To create shareholder value through earnings growth and appropriate returns to capital
Risk is: A potential source of competitive advantage as shareholders require us to manage risk prudently.
Memory horizon: Appropriately long to anticipate future cycles, informed by changes in the market over time
Metrics: RAROC; SVA
Line of Business
Manages the budget / P&L Acts as primary risk manager
Risk Management
Manages performance information Serves advisory and control function
Risk Management does not make you safer –just more efficient
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Risk Management Continuum
Silo-ed Approach
Aggregated Approach
Integrated Approach
ERM
According to recent RMA survey, most firms indicate that they have “closed in” on the integrated approach.
Moving beyond exposure accounting and control
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Table of Contents
Enterprise Risk Management2
Current State of Risk Management1
Enterprise Risk Management at BU NA3
Integrating Strategy, Capital and Risk4
Conclusion5
8CapGen Capital
Vision:
Manage all material risks and opportunities across the organization
Objective:
Improve decision making through portfolio management of interrelated risks
Result (Value Proposition):
Increase value by managing to objectives consistent with stakeholder expectations
Enterprise Risk Management (“ERM”)
Strategic not transaction focus
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ERM is… ERM is NOT…
• Integrated view and awareness of risk across organizational disciplines
• Standardized risk-related information, metrics, and communication
• Common definitions
• Coordination of risk related projects
• Just Risk Management
• Just a centralized body for aggregation and translation of data
• Meant to discourage specialization
• Organizational restructuring
• ONLY for Control/Regulatory Compliance
Scope of ERM – Top level Risk view…
…as a strategic input, not an afterthought
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Analytical Solution: Economic Capital
Organizational Solution: Chief Risk Officer
Informational Solution: Dashboard
Management Solution: Governance actions
Cultural Solution: Communications
Enterprise Risk Management Big Ideas
It works in practice, but will never work in theory
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ERM – a work in progress
Source: Deloitte Global Risk Survey, 2006
35%
18%
32%
15%
Yes, program in place
No, but plan to create one
Yes, currently implementing one
No, and do not plan to create one
…need to tailor to your governance and operating philosophy
12CapGen Capital
Table of Contents
Enterprise Risk Management2
Current State of Risk Management1
Enterprise Risk Management at BU NA3
Integrating Strategy, Capital and Risk4
Conclusion5
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The four pillars of BU NA’s ERM Program
Risk Foundation
Risk Philosophy
Value Creation
EnterpriseRisk Management
Program
Man
agem
ent
Info
rmat
ion
Ris
k O
vers
ight
an
d In
depe
nden
ce
Com
mun
icat
ions
and
Esc
alat
ion
I II III IV
Str
ateg
ic P
lann
ing
and
Alig
nmen
t
Value creation through RiskManagement not minimization
14
ERM Dashboard – make things as simple as possible
Com'l PFS GSTS Total
Business
Credit
Operational
Market
Interest
Liquidity
Strategic
Compliance
ALM - RWAALM - EC
Human Cap.
IT
Legal
SOX
Audit
Qu
anita
tive
Ris
kQ
ual
itativ
e R
isk
ALMAsset Mgmt. Services
GlobalMarkets
Global Clients
Transaction
Banking
Private Clients
Vision
Efficiency
Efficiency
Eff & Grow th
Grow th
Grow th
Grow th
Controls
Controls
People
People
Unacceptable Level Unknown - Need More Info Acceptable Level Un-Rated
Distribution of Risks by Probability and Impact
BE
F
G
H
IJK
L
M
0%
5%
10%
15%
20%
25%
30%
0 10 20 30 40 50 60
Average Expected Impact
Ave
rage
Pro
babi
lity
Client/Corporate Credit Default (6)
Legal Risk (4)
General Economy Decline (4)
Declining Employee Morale/Loss of Top Employees (5)