Risk Management Watch: Risk Central to Business Strategy
Federal Reserve Governor Randall Kroszner says risk must be central to business strategy. In a recent speech to the annual conference of the Risk Management Association in Baltimore, Maryland, Kroszner urged institutions to address shortcomings in their risk management structures. “The current environment certainly presents some fundamental challenges for banking institutions of all types and sizes. Their boards of directors and senior management, who bear the responsibility to set strategy and develop and maintain risk management practices, must not only address current difficulties, but must also establish a framework for the inevitable uncertainty that lies ahead,” Kroszner said.
Today, firms are struggling to adjust to the unfolding global economic environment and taking action to avoid the problems that have taken a toll on their balance sheets. As a result, executive recruiting firm, A.E. Feldman, says understanding and managing enterprise-wide risk has become a top priority. The firm reports that risk management jobs are evolving to better manage initiatives to ensure that business objectives are met, losses are minimized, business processes are improved and greater accountability is achieved. Investing in complex mortgage-backed securities is what led financial institutions into the current credit and mortgage crises, according to industry experts. As firms struggle to minimize losses, experienced Chief Risk Officers and Risk Managers are essential.
Kroszner believes we are in the midst of a fundamental transformation in financial services, with market-wide ramifications. “Risk management shortcomings need to be addressed not only to improve the health and viability of individual institutions, but also to maintain stability for the financial system as a whole,” he said in remarks at the annual conference of the Risk Management Association. Kroszner went on to say that many firms have failed to include adequate risk assessment as part of their overall corporate strategies. “Risk management needs to be interwoven into all aspects of the firm’s business and should be part of the calculus for all decision-making,” he added.
Kroszner however, did suggest that addressing the inadequacies in risk management could require fundamental changes from some firms. “Building a rigorous strategic risk management framework requires an institution to reexamine both its internal practices and its external environment, and to understand how closely the two are connected,” he said.
Kroszner also cautions banks that senior management must have a true understanding of all risks involved. “Assessing potential returns without fully assessing the corresponding risks to the organization is incomplete, and potentially hazardous, strategic analysis,” he said. The Fed Governor also warns that banks should prepare for regulatory change.
In keeping with Kroszner’s comments, The American Academy of Actuaries recently submitted testimony to lawmakers recommending that effective enterprise risk management (ERM) become a foundation for the future of oversight and regulation for financial services. Risk management principles are critical to averting the risks that are crippling the economy, according to the group.
Enterprise risk management is the process of identifying, quantifying, mitigating, and managing both short- and long-term risks – including emerging risks that previously have not been considered, says the American Academy of Actuaries. The actuaries concluded that organizations with effective enterprise risk management processes are better positioned to avoid or mitigate the impact of severe financial crises and can provide confidence to stakeholders and the public.
Public policymakers, who are trying to restore confidence in the financial markets affected by the credit crunch, could benefit from actuaries’ knowledge, skills, and support, notes the Academy’s President William Bluhm.
Are you working in Risk Management? If you want to grow your career or your company’s bottom line, contact A.E. Feldman’s President, Mitch Feldman, now. Find out more about CFO and Risk Management jobs today!
