Enterprise risk management: Myth or reality?
28 October 2003
The concept of enterprise-wide risk management has become imperative for the financial services industry. Mitali Kalita offers hints to convert this strategy into a success
Chennai: Managing risk is an old habit of human beings. In our day-to-day life, we seem to be always worried about future risks. As a result, we end up investing in insurance or other investment instruments to secure ourselves against those unseen risks. Accidents, environmental disaster, bankruptcy, loss in business, and death are risks that have plagued us since time immemorial.
Generally, we cannot get a complete shield against any potential risk, but we can adopt appropriate proactive measures to mitigate every risk. The same concept applies to the financial services industry, too. However, managing risk individually seems to be less talked-about today, while enterprise-wide risk management (EWRM) or firm-wide risk management or integrated risk management seems to be the current buzzword.
This article is about how the concept of enterprise-wide risk management has evolved over the years. It points out why the concept has become imperative for the financial services industry and offers hints for a successful enterprise-wide risk management strategy. The article also throws light on the difficulties the industry is facing while preparing for the ultimate risk integration mantra.
A classical definition
Enterprise-wide risk management has been defined as the uniform and integrated approach of a financial services organisation to identify and manage risks across the enterprise. Basically, there are four key risks that an organisation encounters — credit risk, market risk, operational risk and liquidity risk. Operational risk is a new effort put forward by the Basel Accord II, which the industry will now have to include into its current risk portfolio.