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CRA - Enterprise Wide Risk Management

The document discusses different types of risks faced by companies including business risks, financial risks, event risks, legal risks, reputational risks, disaster risks, political risks, and regulatory risks. It provides details on each type of risk and how they can impact companies.

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Harking Castro Reyes
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34 views26 pages

CRA - Enterprise Wide Risk Management

The document discusses different types of risks faced by companies including business risks, financial risks, event risks, legal risks, reputational risks, disaster risks, political risks, and regulatory risks. It provides details on each type of risk and how they can impact companies.

Uploaded by

Harking Castro Reyes
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Enterprise Wide Risk

Management
Enterprise Wide Risk Management
Company-wide
Risks
Business Non-business
Risk Risk

Event Financial
Product Risk Risk
Risk
Legal Market
Macro- Risk Risk
Economic
Risk Reputational Credit
Risk Risk

Technological Disaster Liquidity


Risk Risk Risk

Regulatory, Operational
Political Risk
Risk
Enterprise Risk Management
Business Risks
 Risks that the corporation
willingly assumes to
create a competitive
advantage and add value
for shareholders
Enterprise Risk Management
Business Risks
 Risks are symmetrical
which means they can
create both gains and
losses
Enterprise Risk Management
Business Risks

 Risk pertains to the


product market where
a company operates
and includes product
design and sales
Enterprise Risk Management
Business Risks

 The product market creates implicit exposure


to:
macroeconomic risks resulting from economic
cycles or fluctuations in incomes and monetary
policies
technological innovation risks
Enterprise Risk Management
 Analysis Techniques in
Strategic Risk Management
Scenario analysis
Sensitivity analysis
Control self assessment
Special risk reviews
Enterprise Risk Management
 Strategic Risk

Risks undertaken by senior officers when they


make high level strategic decisions for the
bank
Risks in undertaking excessive risks
Risks in influencing decisions that are outside
the scope of financial risk management
Enterprise Risk Management
 Strategic Failure Risk
 Risk of failure resulting from strategic decisions of
senior management like change of direction or
business model of the bank

E.g., Bankers Trust changed of business model from a


commercial bank to an investment bank resulting in
it finally being sold to Deutsche Bank in 1998.
Enterprise Risk Management

Financial Risks
 Risks associated
with the effect of
financial variables
like market
risks, credit risks,
and liquidity risks
Enterprise Risk Management
Financial Risks
 Risks are also symmetrical
because they can create
both gains and losses
Enterprise Risk Management
Event Risks
 Risks ascribed to other
negative events outside
the control of the
company
 Risks that create only
losses, some of which
can be covered by
traditional insurance
Enterprise Risk Management
Legal Risks
 Risks that reflect the
possibility of losses due to
the fact that contracts are
not legally enforceable or are
documented incorrectly
Enterprise Risk Management
Legal Risks
 This risk can be limited
through policies
developed by the
company’s legal counsel,
as approved by senior
management
Enterprise Risk Management
Legal Risks

 It is sometimes
classified within
financial risk because
it occurs regularly due
to market or credit
losses suffered by end
users
Enterprise Risk Management
Legal Risks
 Prior to engaging in trades,
banks ensure that their
counterparties have the
legal authority to do so
and that the terms of the
contracts have a sound
basis
Enterprise Risk Management
 Legal Risk
 Banks require traders to get signatures from counterparties
based on VAR limits to avoid legal suits later on
Example:
Above a VAR level of $ 1 million, the transaction must be
approved by the finance director of the counterparty
Above a VAR level of $ 5 million, the transaction must be
approved by a more senior executive like the CFO or CEO of
the counterparty
Enterprise Risk Management
Legal Risks
 Contracts that lead to
large losses for
counterparties often end
up in a lawsuit
Enterprise Risk Management
Legal Risks
 Such contracts are
invariably claimed
unsuitable to the end
user’s needs or level of
expertise
Enterprise Risk Management
Legal Risks

 The use of standardized


contracts reduces legal
risks like master netting
agreements
Enterprise Risk Management
Reputational Risks
Damage, in addition to
monetary losses, caused
to the ongoing business of
a company due to a
damaged reputation
Enterprise Risk Management
Disaster Risks
Risks that includes natural
disasters like earthquakes,
floods, tsunamis, volcanic
eruptions, tornadoes,
typhoons, fires, as well as
war
Enterprise Risk Management
 Disaster Risk

Risk caused by natural disasters like floods,


earthquakes, fires, and war
Normally covered by insurance
Risk can be mitigated thru contingency
planning and back-up facilities
Enterprise Risk Management

Political Risks
 Risks that arises from
actions taken by
policymakers that
significantly affect the
way an organization
runs its business
Enterprise Risk Management

Political Risks
 For example, big financial
losses, either attributed to
hedge funds or
derivatives, regularly lead
to threats of legislative
intervention
Enterprise Risk Management

Regulatory Risks
 Risks that are the result of
changes in regulations or
interpretation of existing
regulations that can negatively
affect a firm

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