Shared risk enterprise

Bill Githens stresses the importance for organizations of all sizes to actively manage and understand their enterprise risk management strategies, particularly in light of the current economic climate.

“Risk management creates value for the enterprise. It was true 100 years ago, and it is still true today.”
-Bill Githens

The recent financial crisis underlines the importance of enterprise risk management in institutions of every size. Credit risk, market risk, and operational risk must be determined at the business level and then calculated into the overall risk faced by the enterprise. Only an enterprise-wide focus on risk allows institutions to understand how interrelated risks can impact the organization. 

Risk management creates value for the enterprise. It was true when the Risk Management Association (RMA) was founded almost 100 years ago, and it is still true today. Throughout the many business cycles of the past century, RMA has remained relevant for its members. Why? Because we provide an opportunity for the industry and its practitioners to learn from each other's experiences and to share sound practices.

Since 1914, RMA has helped risk managers meet the challenges posed by the economic environment and new regulation. Our members participate in studies and peer-sharing events, such as roundtables and conferences, and guide us as we develop educational programming. We don't lobby, but our Community Bank Council and Regulatory Relations Council meet informally with the regulators to discuss issues of mutual concern. We act as a liaison between the industry and its regulators.

For at least two years leading up to the crisis, RMA warned that the environment would soon become more challenging, and that proved to be quite an understatement. Many were well aware that underwriting standards had declined markedly across the board amid an intensely competitive environment awash in liquidity. There was also ample warning that financial engineering techniques were producing exotic instruments that many in the industry did not understand. Yet risk management organizations within a number of institutions clearly failed to intervene. Why? This is the most important question going forward, and answers are beginning to emerge.

First, organizations need to institute a strong risk culture, one in which risk becomes the responsibility of everyone in the organization, not just the chief risk officer. Stronger risk management expertise at the board level of financial institutions is clearly needed. The board should help management sets its risk appetite, and to do so it must have a clear understanding of the risk/reward ratio the institution seeks to achieve. Only then can it align the organization's strategy with it. Compensation schemes also must be aligned accordingly to ensure that incentives are tied not just to return, but to risk-adjusted reward.

Another lesson is that while risk management analytics have made tremendous strides over the past decade, models cannot be allowed to replace sound judgment. Without a doubt, advanced modeling is necessary, but it cannot drive strategic decisions in a vacuum.

The crisis has underlined the global nature of banking and risk, so RMA is increasing its presence in Europe and Pan Asia where we are offering courses, performing research, and establishing chapters. While the current environment is certainly stressful, it offers a unique opportunity for risk management professionals. We encourage our members to take advantage of these products and services, developed with the help of members for the benefit of themselves, their institutions, and the industry.  

Get help with your risk management

• Annual Statement Studies-The only source of comparative data that comes directly from financial statements of the small and medium-sized business customers of RMA's member institutions.

• eMentor - RMA's web-based, comprehensive knowledge and information tool. This tool powers RMA University Online, our new online training.
• eRAS^®-Commercial credit risk benchmarking for community banks, a Web-based, subscription service.
• RMA-Credit Risk Certified-This professional designation validates and recognizes the skills and experience of those who pass a rigorous exam on commercial real estate lending.
• Surveys and studies-Including recent surveys of enterprise risk management, risk appetite, and counterparty credit risk.  
• Securities Lending Quarterly Aggregate Composite
• The RMA Journal-Published 10 times per year, The RMA Journal features articles written by industry practitioners that advance sound practices.

About RMA
Founded in 1914, The Risk Management Association is a not-for-profit, member-driven professional association whose sole purpose is to advance the use of sound risk principles in the financial services industry. RMA promotes an enterprise-wide approach to risk management that focuses on credit risk, market risk and operational risk.

Headquartered in Philadelphia, Pennsylvania, RMA has approximately 3000 institutional members that include banks of all sizes as well as nonbank financial institutions. They are represented in the Association by 18,000 risk management professionals who are chapter members in financial centres throughout North America, Europe and Asia/Pacific. 

Risk Reform

At the time of going to press, in a bid to overhaul the US financial system and to better regulate banking and minimize risk, President Obama had seen his landmark bill approved by the US House of Representatives.

At the time of the bill's passage in the House by 237 votes to 192, President Obama said in a statement that it will "make our financial system more transparent, so that complex transactions that escaped scrutiny in the past will now be done in the light of day."

President Obama campaigned during the elections on the promise that he would "hold Wall Street to account" for the global economic downturn and, as such, the bill will aim to impose strict limits of banks' abilities to make risky speculative bets on certain markets.

The legislation will see the creation of a new federal agency designed to oversee consumer lending and outlines new regulations for complex financial instruments. It will also have powers to clamp down on abusive practices by credit card companies and mortgage lenders.

It will also see the implementation of the Volcker rule, named after former Federal Reserve chairman Paul Volcker who proposed it. This rule will aim to ban banks from risky entanglements in the financial markets. As such, US banks will be barred from taking big trading bets on markets. All US banks will also be limited to investing a maximum of three percent of their capital in speculative businesses such as hedge funds or private equity funds.

Treasury Secretary Tim Geithner said the bill that had emerged was "strong" and described it as "the most sweeping set of financial reforms since those that followed the Great Depression". The bill will now go to the Senate but that vote will not be carried out until mid-July. The Senate vote is expected to be close.