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  1. 1. EnterpriseRiskManagementRisks ?Snakes & ladders1
  2. 2. Risk and Organizational structure Strategic planning for risk mitigation Characteristics of Risk Management PoliciesRisk and Designing Risk Management manualsOrganizational and reportsPlanning Decision making and planning 2
  3. 3. Introduction Introduction √toto Risk Management Risk Management Administration 1 Administration and operational Risks Administration operational Risks Risk Risk and and and Operational Risks Ris √ Organizational Planning Organizational Planning 4 Risk and Return and Return √ 5 2 Enterprise Risk Management syllabus Risk in Risk in in Risk Risk Management Risk Management Organizational Risk Management Risk Management Risk Management Organizational Organizational nformation Systems formation Systems Standards Context and Information Systems Standards Standards Context Context 3 √ 6 7 1 3
  4. 4. Risk and Organizational structure Strategic planning for risk mitigation Characteristics of Risk ManagementRisk and PoliciesOrganizational Designing Risk ManagementPlanning 5 manuals and reports Decision making and planning 4
  5. 5. Focuses on the quality of decision making processes and the scope for embedding risk management in decisionsDecision making and planning 5
  6. 6. Basic decisionprocessframeworkUncertaintyin the decisionProcess Attitude to risk Characteristics Framing of an individual effects decision maker Group decision process Conclusions 6
  7. 7. An understanding of the nature of decisionprocesses and associated sources ofuncertainty is important because this canhelp to motivate Risk Management effortsand guide the focus of RM efforts ,ultimatelymaking RM more efficient and effective. 7
  8. 8. Risk management process Establish the contextC The external contexto The internal context The Risk management contextm Develop risk evaluation Mm Define structure of risk analysis ou nn Identify the risks iI What can happen When, where and how tc oa Risk Assessment rt Analyze the risks &e Determine probability Determine consequence r& Estimate level of risk eC vo Evaluate the risks Compare with criteria No in Set priorities yes eS Treat the risks wu Identify optionsl Assess optiont Prepare treatment plans 8
  9. 9. Steps in Risk Management Execute Monitor Identify and strategies risk quantify 5 and reporting risks 6 1 Establish Implement Establish business controls risk unitand procedures tolerance strategies 4 and policies and metrics 2 3
  10. 10. Organisational structure Board of Directors Decide overall risk management 1 policy and strategy Risk Management Committee Board Sub Committee incl CEO &Heads 2 3 Of Credit, Market & Operational Risk Management CommitteesChief Risk officer is responsible for market risk management, planning & operations 4 5 Middle Office ALM Support group consisting of experts in Asset Liability Committee market risk management, consisting of staff Headed by CEO incl Chief of economists,statisticians for analysing, Investment, Credit… Responsible for independent monitoring & Ensure adherence to the risk assessment which is reporting the risk limits,monitoring and control critical to ALCOs key functionprofiles to ALCO,prepare articulating interest rate view of controlling &managing simulations on possible transfer price mechanism market risks track magnitude of changes in the market policy and submit to RMC market risk on real time basis conditions To know total market risk exposure assumed by the bank 10 ALCO control framework * ALM Policy
  11. 11. Decision making and planningDecision making is a fundamental process in anyenterprise and no activity, including RiskManagement, is possible without decision making.Risk management will be most effective when it is‘integrated’ or ‘embedded’ into all aspects oforganizational decision making and individualdecisions. One way to achieve this is to consider how RM might be used within individual processes to help address 11 the subject matter of the decision,
  12. 12. Decision making and planningTo understand the potential roles that RiskManagement might play it is necessaryi. to examine the components of a decision processii. to understand where uncertainty can arise, andiii. what the implications of this uncertainty can be for the decision process 12
  13. 13. Decision making and planningRisk Management also has a potential role inmanaging the decision process itself.This second role is concerned with enhancing thequality of the process, partly by adopting goodpractice, but also by highlighting and minimizingbad practice.This implies considering how decision making is supported andorganized, the role that participants play in any particular decisionprocess, and how their motivation and attitude to uncertainty can drivedecision processes 13
  14. 14. Consistently making decisions which havesuccessful outcomes is extremely difficult,some might say impossible. The fact that aprevious decision had a good outcome doesnot of itself help much in making the nextdecision.What does help is an understanding of whatmakes a good decision process. 14
  15. 15. Decision Process Framework Stages involved in any decision processi. Monitoring of the environment and current activities, for issues that require resolutionii. Issue recognition problems perceived threats possible opportunities Need to decide on a future courseiii. Scope the decision – put boundaries on factors relevant to the decision 15
  16. 16. Decision Process Framework Stages involved in any decision process Involves careful attention to each of the decision stagesiv. Determine performance criteriav. Identify alternative courses of actionvi. Assess the outcomes of courses of actionvii. Compare outcomes and choose a course of actionviii. Implement the chosen alternativeix.Monitor and review performance May be regarded as outside the decision process 16
  17. 17. A high quality decision process involves carefulattention to each of the decision stages in DecisionProcess- Appropriate scoping of decision area and participants,- All relevant performance criteria identified and relative priorities and trade offs identified,- A wide range of possible alternative courses of action identified 17
  18. 18. - Careful weighing of both positive and negative consequences of each alternative ,assumptions tested, and implications of uncertainty fully taken into account- Plans for implementation made incl contingency plans. 18
  19. 19. Unfortunately, achieving a high quality decision processcan be difficult for several reasons;i. the decision is complicated by interactions and inter-dependencies with other decision situationsii.Performance criteria are multiple,conflicting and difficult to quantifyiii It is impossible to examine a wide range of alternatives because of ignorance of alternatives or because of their consequences are difficult to assess.iv. There is insufficient time for careful search for alternativesv .There are limited resources
  20. 20. Uncertainty in the decision processUncertainty is associated with the information usedin each stage of the decision process.In this respect, suppliers of such information oftenhave a significant influence on the quality of thedecision process. –eg cost estimators can drivechoices by the way they select and interpret data to formulate estimates. 20
  21. 21. Uncertainty in the decision processStage in the decision process Uncertainty aboutMonitoring the environment and Completeness, veracity,current activities accuracy of information received, meaning of information, interpretation of implicationsIssue recognition Significance of issues, urgency, need for actionScope the decision Appropriate frame of reference, scope of relevant organization activities, who is involved , extent of separation from other decisions 21
  22. 22. Uncertainty in the decision processStage in the decision process Uncertainty aboutDetermine performance criteria Relevant performance criteria, whose criteria, appropriate metrics, priorities, tradeoff between different criteriaIdentify alternative courses of Nature of alternatives available,action scope, timing& logistics, level of detail requiredAssess the outcomes of courses Consequences, nature ofof action influencing factors, size of influencing factors effects and interactions 22
  23. 23. Uncertainty in the decision processStage in the decision UncertaintyprocessCompare outcomes and How to weigh and comparechoose a course of action predicted outcomesImplement the chosen How alternatives will work inalternative practiceMonitor and review What to monitor:how often toperformance monitor, when to take further action 23
  24. 24. Uncertainty in the decision processEmploying group decision making is expensive interms of the opportunity cost of participantsinvolvement and in terms of the additional time thatgroup decision making typically entailswhether benefits of using a group process will outweigh the cost ? 24
  25. 25. Characteristics of an individual decision makerIn addition to the inherent difficulties in addressinga given decision situation and associated uncertainty, limitations in the information processing abilities ofdecision makers can impair the quality of decisionprocessesJanis and Mann [1977] have observed that theinformation processing capabilities of a decisionmaker are affected by the level of stressassociated with a decision. 25
  26. 26. Characteristics of an individual decision makerThe amount of stress is proportional to the risk ofloss resulting from the decision.Janis &Mann further argued that in conditions ofextremely low or high stress informationprocessing will be defective, while moderate stressleads to high quality decision processes 26
  27. 27. The quality of decision deliberations can be influenced by adecision maker’s personality, personal [recent] experience,Predispositions, prejudices, and biases. For example.individuals may;- structure issues and scope decisions based on their own experience.- preferentially seek out information that is consistent with their own beliefs, and pay less attention to information that is not- Accept satisfactory explanation rather than seek out the most correct explanation such as focusing on people as the cause of the behaviour and events
  28. 28. - manner which tends to confirm the initial choice seek out confirming data whish supports their preferred choice and down play or disregard evidence which does not support this choice,- Once committed to a course of action ,perceive and evaluate alternatives in a more biased ,subjective.
  29. 29. Attitude to riskA key driver of individual decision makingbehavior is attitude to risk.It is often suggested that decision makers Prefers less risk, to more risk, lacksare risk averse. ? precision and not helpful.This needs consideration in the light ofemerging developments. 29
  30. 30. Group Decision ProcessesGroup decision processes present more complexdecision contexts than individual decision makingprocesses, because participants will have;- Differing information bases- Differing past experiences- Varying perceptions of the decision context and alternative courses of action- Differing views of relevant performance criteria and priorities- Other agenda relating to personal objectives and relationships with other participants 30
  31. 31. Potential benefits of group decision processDecision about when to use group decision makingshould be guided by the following benefits;i. Increased creativity Group discussion can stimulate creative thinking, particularly about alternative courses of action. A tentative suggestion from one member may spark off a productive discussion that develops the suggestion and generates further lines of thought 31
  32. 32. Potential benefits of group decision processii. Increased knowledge and information Quality of each decision may be enhanced by sharing of information and expertise of a variety of participants from different technical backgrounds or stake holdersiii. Co-ordination of different perspectives Co-ordination will be an important motivation for the use of group decision processes where issues and decisions are complex. The purpose of group is to develop a full understanding of decision context and issues a coherent set of objectives and priorities across the objectives 32
  33. 33. Potential benefits of group decision processiv. Participation increases comprehension and acceptance Group decision making allows for the views ofdifferent interest groups to be aired. This canincrease the potential for conflict, but provides anopportunity to take differing interests into accountand resolve differences. This increasesacceptability of decisions, and reduces resistance. 33
  34. 34. Potential benefits of group decision processv. Increased motivation of group members Participation in a group can increase anindividual’s sense of belonging and self esteem,particularly if the decision is an important one. Thesocial pressure of the group provides immediatemotivation by stimulating greater efforts tocontribute to deliberations. 34
  35. 35. Potential benefits of group decision processvi. Learning and development of participantsGroup decision process can provide an opportunityfor participants to learn from one another. This isoften thought of in terms of less experiencedpersonnel developing their knowledge anddecisionprocess skills by observing others moreexperienced members of the group 35
  36. 36. Potential problems with group decision processesGroup decision processes have at least five majordisadvantagesi. Tendency for premature decision making Often the first explanation to receive significant support prevails over other potentially superior alternatives. This effect is compounded by the tendency of groups to become prematurely committed to a course of action Additionally, some members of the group may have committed to a particular interpretation of the decision issues and appropriate courses of action even before group starts to deliberate. 36
  37. 37. Potential problems with group decision processesii. Individual dominationGroups may be dominated by a formal or informalleader whose problem solving abilities may or maynot be good. If time is pressing and the progressthru the decision Process stages is lacking, thegroup leader may take the responsibility formaking the decision. The danger is that such anoutcome may have been engineered. 37
  38. 38. Potential problems with group decision processesConcern with winning the argumentiii Members become committed to a specific view and turn more concerned with winning the argument 38
  39. 39. Potential problems with group decision processes Lack of acceptance of responsibility for a decisionvi Collective responsibility for a decision may be interpreted as meaning no individual to blame. Actions agreed may not be pursued.Compromise decisions v.Group decision making which involves significant compromise tends to preclude the acceptance of radically different courses of action or perspectives 39
  40. 40. Conflict and conformityIt is accepted that that some level of conflictor difference of opinion increases the qualityand quantity of analysis in decision process. 40
  41. 41. Potential problems with group decision processesGroups make more risky decisions? 41
  42. 42. What is risk appetite?Risk appetite is the level of aggregate riskthat a company can undertake andsuccessfully manage over an extendedperiod of time.The capacity for undertaking risk will vary bycompany and depend on circumstancesunique to the company. 42
  43. 43. What is risk appetite?To determine its capacity, a company will need toinitially establish a set of corporate objectives anddevelop corresponding risk managementstrategies to successfully manage its risks.Objectives will be driven by stakeholder demands.To determine the risk appetite, the risks to eachobjective need to be assigned a specific risk limit 43
  44. 44. Risk management process Establish the contextC The external contexto The internal context The Risk management contextm Develop risk evaluation Mm Define structure of risk analysis ou nn Identify the risks iI What can happen When, where and how tc oa Risk Assessment rt Analyze the risks &e Determine probability Determine consequence r& Estimate level of risk eC vo Evaluate the risks Compare with criteria No in Set priorities yes eS Treat the risks wu Identify optionsl Assess optiont Prepare treatment plans 44
  45. 45. Corporate Risk Management MissionWe shall support the business in establishingan effective risk management frameworkcomprising policies, processes andorganization. 45
  46. 46. Corporate Risk Management MissionWe shall facilitate communication on issuesrelating to risk management, amongst thebusiness units ,the top management and the BOD.We shall, when needed present to the top mngtand the Board ,an integrated view of risks in theCompany’s business profile. 46
  47. 47. Corporate Risk Management MissionWe shall become an enabler of growth for thecompany by helping its businesses ensures thatthey;- Understand the risks that are inherent in their business- Continuously measure and monitor these risks: &- undertake effective steps to manage these risks. 47
  48. 48. Corporate Risk Management MissionWe shall serve as a knowledge centre for riskmanagement and work with the businesses tocreate and develop capabilities in riskmanagement.We shall ensure that a culture of “risk aversion”is not fostered in the company,by promoting a forward looking and innovative approach to business where taking of calculated risk in the pursuit of opportunites to benfit the or 48
  49. 49. Corporate Risk Management MissionWe shall ensure that a culture of “risk aversion”is not fostered in the Company, by promoting aforward looking and innovative approach tobusiness where taking of calculated risk in thepursuit of opportunities to benefit theorganisation,is enabled. 49
  50. 50. Risk Management Policy objective1. Ensure that L&T through its SBUs,understands and manages the risks to optimise the potential opportunities and minimise the adverse impact of risk.2. Ensure that all significant risks are identified, assessed and mitigated and reported in time to the Divisional /Corporate Risk Committee.3. Define the role & responsibilities at all levels in terms of risk Ownership. 50
  51. 51. Risk Management Policy objective4.Have a well defined metrics to measure the risk.5.Fix the limits and authorisation/ approval structure for risk exposures.6.Comprehensive Risk MIS and reporting structure.7.Have a well functioning risk management system which allows the Depts to commit with confidence the resources required for growth and to assist in achieving their strategic goals. 51
  52. 52. Risk Management Policy objective7. Have a well functioning risk management system which allows the Depts to commit with confidence the resources required for growth and to assist in achieving their strategic and operational goals.8.Enable development of risk management processes and structure.9.Embed risk management culture in the business practices and in project execution/delivery. 52
  53. 53. Risk Management Policy objective10. Provide confidence that the inherent risks are known and are effectively managed for competitive advantage.11. Allow resources to focus on planned growth and strategy while exploiting the risk appetite 53
  54. 54. Risk Management Policy statement1.Promote a culture of developing and maintaining a framework, processes and structure to formally & systematically identify, assess and manage the risk.2.Ensure that risk assessment process is complied with for all new ventures, projects, processes and systems and aligned with Company’s strategic,and operational objectives.3.Risk Management process is implemented at all sites for continuous tracking, measuring and monitoring of risks with effective mitigation 54 plans,
  55. 55. 4. Job Risk Register shall be intrduced at all sits for recording5 The Manager shall be the primary risk owner for the project and he may allocate the risks to the secondary risk owners in their area of work based on experience and competence.6. Provide guidance and training on procedures & practices of risk management to all staff in responsible positions. 55
  56. 56. 8. Risk Committee shall regularly monitor and review the implementation and effectiveness of Risk Management system incl the development of an appropriate risk management culture. 56
  57. 57. Risk Management policy for ERM framework can be considered in three groups:- Policies for the ERM framework and its processes and procedures- Policies for risk management decisions- a .Risk appetite b. Risk criteria c.Internal risk report Commitment, responsibility and timing forMonitoring and review of policies 57
  58. 58. - What is Risk appetite?- How can Risk appetite be measured?- How can your company define its Risk Appetite?- Who are your stake holders and what do they demand? 58
  59. 59. What will it take to meet key stakeholderdemands? - Board of Directors and Management -Employees -Policyholders -StockholdersWhat will it take to meet supporting stakeholderdemands?Rating agencies 59Regulators
  60. 60. How do you create the strategies to meetthese demands?How will decisions be made within yourRisk Management framework?What are your risks to succeeding in thesestrategies? 60