Tuesday, October 13, 2009

Enterprise risk management solutions

1:22 AM Posted by: Slamun Atlanta 0 comments

Today, banks are facing more regulatory requirements, more stringent rating agency oversight, and investor confidence issues. To meet these new challenges, many organizations are examining their policies, methodologies and infrastructure (PMI). These three building blocks form the core of any enterprise risk management environment (Crouhy, Galai and Mark, 2005).
Policies define the tolerance that an organization has for risk. The policies should be consistent with business strategy and should be communicated both internally and externally. The methodologies are the underlying mathematical models that are tied back into performance management. These models must be properly designed, implemented and vetted. The infrastructure refers to having the appropriate people and operational processes (such as data, software, systems, etc) in place to control and report on the risks (Crouhy, Galai and Mark, 2005).
In the past 10 years, there have been countless books, journal articles and other published works that describe a plethora of different ways an organization can calculate risk measures. These vary from a measure that looks only at one specific risk factor to more integrated measures, for example economic capital.
Over the years, the market has endured the US savings and loan crisis, the October 1987 market correction, the 1997 Asian financial crisis, and more recently the 2007 sub-prime mortgage crisis in the United States, now affecting the global banking community. Every one of these market events stresses the importance of having good risk measures and good risk management policies, methodologies and infrastructure. Of these three challenges, the bank is responsible for establishing its own policies and methodologies. These policies and methodologies will be influenced by the internal management organization as well as external factors such as regulatory oversight and investor confidence.
The third challenge, infrastructure, is where the bank may benefit from external, third-party experience in terms of personnel, business processes and information technology (IT). While many banks have internal IT departments, most will agree that technology is not part of a bank’s core competencies. In this case, it may be best for the organization to leverage the knowledge, experience and products from third parties that do have hardware and software development among their distinctive core competencies. This chapter will focus on the information technology infrastructure required to support good enterprise risk management policies and methodologies.

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