Evolution of risk management from risk compliance to strategic risk management: From Basel I to Basel II, III and IFRS 9

Abstract

Risk management, for example relative to its finance counterpart, is a much younger function. This paper examines its evolution across different eras: Basel I, Basel II, III and its follow-ups, and in post International Financial Reporting Standard 9 (IFRS 9). The journey that started as risk compliance in the Basel I era has evolved to include a strategic role post Basel II, as the risk function needs to play a lead role in capital and business mix optimisation, informing corporate strategy. IFRS 9 is another game changer, making the impairment model predictive and ‘risk-based’. These changes require a new partnership model between the risk and finance functions, first in capital management and now in IFRS 9. The paper discusses this necessary evolution of risk management, its strategic role in capital and business risk optimisation, and its essential role in IFRS 9 production and governance.