Enterprise Risk Management – The Benefits of an Integrated Risk Strategy Geoff Kates Chairman, PRMIA Geoff.kates@prmia.o

1. The Professional Risk Managers’ International Association Enterprise Risk Management – The Benefits of an Integrated Risk Strategy Geoff Kates Chairman, PRMIA Geoff.kates@prmia.org

2. Format of Presentation • Defining ERM • Using ERM to Inform Risk Appetite • Integrating Risk Streams • Capital Allocation • Delivering ERM • Questions?

3. Defining ERM

4. The Purpose of ERM • Aligning the entity’s risk appetite and strategies • Creating a single language for discussion of risk issues • Reducing the frequency and severity of operational shocks and losses • Identifying and managing overlapping risks from different business lines • Improving the effectiveness of capital allocation

5. The Essence of ERM • Important that ERM adds value and does not just pay ‘lip service’ to the concept • Countrywide’s commitment to ERM much heralded 12 months ago • ERM is not about box ticking • Aim is to provide valuable information to senior management to enable them to make informed decisions

6. Intertwining Risks ERM is about more than Market, Credit and Operational Risk Critically can now also provide a framework for the management of liquidity risk Unified assessment of the bank’s liquidity position Other risk factors less tangible but just as important to the health of the bank Reputational risk Organisation risk Compliance risk

7. Using ERM to Inform Risk Appetite

8. Aligning Risk Appetite and Strategies Fundamental to define and articulate risk appetite appropriately Conventional risk vs. reward decisions to be taken Communication of this risk appetite can determine its success Entire enterprise needs to be ‘risk aware’ ERM does NOT simply provide a ‘risk number’ for the bank Provides detail and colour to the view of risk

9. Aligning Risk Appetite and Strategies • ERM provides the basis upon which to transfer risk appetite into actionable business strategies • Holistic risk decisions flow down into business planning • Drives awareness of the bank’s wider risk objectives within previously siloed lines of business • Front Office acts as a reflection of firm’s risk appetite

10. Creating a Universal Language for Understanding of Risk • Risk management previously defined by the complexities of individual risk streams • ERM broadens the discussion to allow for consideration of the primary goal i.e. The Enterprise • Brings risk streams together to articulate a bank’s risk culture • ‘Common objectives through shared awareness’

11. Establishing an Effective Risk Culture ERM is inextricably linked to risk culture throughout the organisation The transfer of risk appetite from senior management into the business Requirement to harness interests of revenue generating staff and align with bank’s overall objectives ERM delivers a systematic and rigid way of instilling culture Performed through the ERM process

12. Integrating Risk Streams

13. Handling Overlapping Risks Past 18 months has forcibly demonstrated that risk factors do not operate independent of one another Risk factors are inextricably linked ERM provides a mechanism to assess and manage these overlapping risks Seeks an understanding of what is driving enterprise risk Starts with the fundamental – e.g. Market and Credit Risk Incorporates the less quantitative – e.g. Reputational and Compliance Risk

14. Driving Towards an Unified Approach: Integration Integrating market and credit risk seen as an essential first step Recent events have made this a priority for many Facilitates effective credit mitigation Risk management processes then extended to the financial management of the enterprise Facilitated by the advance of credit derivatives Assists measurement of volatility of revenues, expenses and asset and liability flows

15. Liquidity Management Management of liquidity position enhanced by ERM No longer considers liquidity in isolation Liquidity risk becomes a key component of all risk assessment

16. Meta Hedging Fundamental role of ERM decision-making is meta hedging Taking large positions to hedge exposures of whole lines of business during market turmoil Bear’s move away from this strategy proved extremely costly ERM should act as a way of reporting to senior management the bank’s various risks Allows for strategic enterprise-wide decision making

17. Enterprise Exposure Visualisation Credit crisis has emphasised value of understanding enterprise exposure 3 weeks to identify true exposure to Bear Stearns Integration of risk streams and processes allows for near real-time appreciation of enterprise exposure Dashboard at enterprise level facilitates identification of risk concentrations Demands extensive data and systems integration and real-time data capture

18. Capital Allocation

19. Capital Considerations Global enterprises demand global risk policies / processes Difficulty in aligning global regulation with local enforcement ERM allows for more effective capital allocation across individual entities Global banks can make full use of diversification Ensures adequate allocation at subsidiary level Capital allocation becomes a dynamic management tool

20. Capital Considerations Base business and risk information assimilated by the enterprise layer ERM allows for top-down allocation with a full appreciation of the enterprise picture Risks can be diversified across the entity structure Entities are capitalised to maximise business opportunities

21. Delivering ERM

22. The Mechanism of ERM Split in evidence over whether or not a specific ERM function is employed Some firms pursue ERM philosophies out of Group Risk Others depend on the CRO to drive enterprise risk thinking and pull together a cohesive enterprise risk picture ERM also viewed as an educational tool

23. Revising the Technology Architecture Technology implications of ERM are complex and burdensome Involves integrating numerous data sources and cross-functional processes Need to develop granular drill-down functionality from enterprise level Enterprise risk visualisation involves converging disparate systems, data, processes and people Vital that underlying data retains its integrity All iterative processes and new governance structures are of little use if data is invalid or inconsistent

24. Questions?

25. To Join: www.PRMIA.org Member Support: support@prmia.org The PRM program: certification@prmia.org