The enterprise risk management function in financial institutions

Abstract

Risks faced by financial institutions that cut across the traditional risk categories are increasingly being managed in a new risk department: enterprise risk management (ERM). Functions that are pan-risk in nature depend upon each other, and complement each other and are candidates to be placed in an ERM function, as these functions would benefit from common management and strategic direction. Risk functions that are a natural fit for an ERM department are proposed and considered. The functions discussed include firmwide risk identification, firmwide capital and risk management stress testing, firmwide risk appetite and limits, firmwide risk reporting, and firmwide governance, with particular emphasis on how they complement and depend on each other as well as on what features should be incorporated so that each function will be more effective within an ERM department than it would have been as a separate, distinct risk function. Because an ERM department focuses on new and emerging risks that have no traditional home in risk management departments, ERM analysts must be flexible and willing to develop expertise in areas that are not commonly studied by risk specialists. To illustrate ERM analysis, two case studies are presented: cryptocurrency and climate change risk.