1. RISK GOVERNANCE
IMPLICATIONS FOR
FINANCIAL STABILITY
A Risk Manager’s
Perspective Presented by:
Eneni Oduwole
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2. 2eni Oduwole, 6 July 2015
CONTENT
 Risk, Risk Management and Risk Governance 3
 Risk Universe of Financial Systems 9
 Governance Nexus 19
 Responsibilities for Risk Governance 24
 Conclusion 30
 References 32
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3. RISK, RISK MANAGEMENT
AND RISK GOVERNANCE
Brief Introductions
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WHAT IS A RISK?
It is the possibility that a
decision or action could
lead to a positive or
negative event in future
It implies future uncertainty

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WHAT IS RISK MANAGEMENT?
It is a discipline that deals with the possibility that
decisions and actions taken by the organization
may cause unexpected results
It trains us to deal with uncertainties and ensure
that suitable controls are implemented to mitigate
likely exposures for losses
It raises the awareness that all decisions made
and business activities engaged in may result in
consequences that are positive, negative or both
It makes organizations ascertain and agree on the
level of risk to take in achieving its goals

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WHAT IS RISK GOVERNANCE?
It refers to the institutions, rules conventions, processes and
mechanisms by which decisions about risks are taken and
implemented
It analyses and formulates risk management strategies to avoid
and/or reduce the human and economic costs caused by disasters
(Wikipedia)
It is implemented through defined structures
It enables institutions minimize the negative consequences of
inherent risk exposures

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FEATURES

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GOVERNANCE RESPONSIBILITIES
• Risk appetite and toleranceBoard
• Ownership and accountability
Process Owners (All
Staff)
• Business requirement
Mgt Staff / Dept Heads /
Line Managers
• Risk standards and benchmarksERM
• Independent reviewInternal Audit

9. RISK UNIVERSE OF
FINANCIAL SYSTEMS
The Typical Risk
Landscape of Financial
Institutions
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COMPONENTS OF A FINANCIAL
SYSTEM

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LIKELY BUSINESS ACTIVITIES

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TYPICAL RISK UNIVERSE

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FINANCIAL SYSTEM STABILITY
Approach 1:
i. Takes a systematic view of the entire financial system and
emphasizes its resilience as a key component of its stability
ii. With this approach, it is assumed that financial stability stems
from a financial system that is durable, that does not experience
major disruptions and offers an efficient basis for allocation of
savings to investment opportunities, Mishkin (1991 and 1997)
iii. The ability of the system to act as a shock absorber when an entity
within the system fails attests to how stable the system is

14. 14eni Oduwole, 6 July 2015
FINANCIAL SYSTEM STABILITY
(CONT’D)
Approach 2:
i. Financial stability is likened to situations without banking crises
and with asset price stability
ii. With this approach, rates and product offerings are relatively
predictable and consistent
iii. It is however weaker than Approach 1 because the strength of its
resilience is hardly tested; this approach does not provide
confidence on the relative strength of the financial system

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FINANCIAL SYSTEM STABILITY
(CONT’D)
Approach 3:
i. A hybrid of Approaches 1 and 2 that was promoted by Crockett (1997)
ii. Stability requires that key institutions (too big to fail) are stable, are able
to meet their obligations consistently without interruption or external
support
iii. This approach requires that key markets are also stable to allow players
confidently consummate transactions at prices driven by demand and
supply consistently where there are no changes in the macro-economic
fundamentals; Financial stability is therefore likened to situations without
banking crises and with asset price stability
iv. With this approach, rates and product offerings are relatively predictable
and consistent
v. It is however weaker than Approach 1 because the strength of its
resilience is hardly tested; this approach does not provide confidence on

16. 16eni Oduwole, 6 July 2015
STABILITY → SOUNDNESS
Stability
• Based on state of financial
system components
• Not easily measurable
• Test of resilience is usually
known after the fact
• May be wishful thinking
Soundness
• Constitutes a major component
of overall stability
• Is measurable
• Reflects the element(s) of
resilience
• Is more robust

17. 17eni Oduwole, 6 July 2015
Capability of
regulators to
build and sustain
an efficient
system
Sustainabl
e
macroeco
nomic
policies
Effective
manageme
nt of
counterpar
ty risks
DRIVERS OF STABILITY IN
FINANCIAL SYSTEMS
Robustness of
payment systems
(esp. in major
financial centers)
Credible
exchange
rate regime
Trustworthy
payment
systems

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RECOMMENDED RISK
GOVERNANCE STRUCTURE Layered Governance Practices
 Subsequent layers are modeled by the output of the previous layer
 Previous layers are defined to demonstrate the required practice of the
next
 This structure should govern the activities and practices of all
components in the system
This layered practice of Risk Governance in Financial Systems is
commonly known as “The Governance Nexus”

19. GOVERNANCE NEXUS Required Interrelationships
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COMPOSITION
Govt
Regulatory
Agencies
Financial Institutions
Corporate Sector
/ The Public

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KEY DRIVERS
Regulatory Governance
=
Financial Liberalization + Advanced Risk
Management

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FOCUS
 Managing the rise in competitive pressures within the system
 Increase in liquidity crisis and leverage
 Financial soundness of institutions
 Efficiency of the market infrastructure
 Managing the spread of cross-market and cross-sector financial
distress

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BASIS FOR GOOD GOVERNANCE
 Independence: Regulatory agencies should be insulated from improper
influence from the political sphere and other supervised entities
 Accountability: It is crucial that regulatory agencies are able to willfully
justify their actions against the context of the mandate given to it by the
Government or Legislature
 Transparency: Regulatory Agencies should create an environment in which
their objectives, frameworks, decisions and modus operandi are made
available to the public in a comprehensive, accessible and timely manner
 Integrity: Regulators as enforcers must pursue institutional goals without
compromises or unethical behaviours

24. RESPONSIBILITIES FOR
RISK GOVERNANCE
Key Priorities for All layers
in a Financial System
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RESPONSIBILITIES
Government
 Promote good public sector governance
 Demonstrate transparency and anti-corruption across all levels of
government
 Maintain an effective legal and judicial system
 Does not promote government ownership

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RESPONSIBILITIES (CONT’D)
Regulatory Agencies
 Promote and oversee the implementation of sound practices in
financial intermediaries
 Maintain sound governance practices internally
 Establish credibility amongst players in the financial system
 Promulgate good practices in the institutions being monitored

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RESPONSIBILITIES (CONT’D)
Financial Institutions
 Responsible for establishing good governance practices that would
gain and keep the confidence of customers and the markets
 Ensure that their customers in turn implement good corporate
governance practices in their organizations (Caprio and Levine,
2002)
 Stimulate the efficient allocation of resources in the economy which
in turn assures the soundness of the financial system.

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PILLARS FOR FINANCIAL SYSTEM
STABILITY (FSS)
FSS
Macroeconomic
Conditions
1. Monetary Policy
2. Debt Structure
3. Exchange Rate Policies
4. Economic Growth
Regulatory &
Supervisory
Conditions
1. Regulatory Framework
2. Supervisory Efficacy
3. Safety Net Management
4. Contingency Planning
Market
Infrastructure
1. Money & Exchange Markets
2. Payments & Settlements
3. Financial Accountability
Responsibility for Regulatory Governance

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RECOMMENDED RISK
GOVERNANCE STRUCTURE FOR
FINANCIAL INSTITUTIONS

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CONCLUSION

31. Eneni Oduwole
enenioduwole@gmail.com
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32. 32eni Oduwole, 6 July 2015
REFERENCES
 www.ecb.europa.eu
 www.investmenttodayer.blogspot.com
 www.nomuraholdings.com
 www.sec.gov
 www.imf.org
 www.bis.org