Enterprise Risk Management

What is risk???
Market Forces
• Macro economic factors: Political stability, Legal &
regulatory factors, Economic factors (exchange rates,
interest rates, unemployment, GDP growth, inflation,
commodity prices etc)

• Monetary policy

• Fiscal policy

• Stock market returns

• Geo-political factors

• Market liquidity
Recent events
ASPI Index
Crude oil
Gold
Bit coin
Disruptive Innovations
Case Study - Dabbawala
Barings Bank - Nick Leeson
Case Study - Ghantewala
Measuring consequences and likelihood of occurrence
• Risk Matrix could be used to raise awareness and increase visibility of risks.

• A risk is “rated” for its Probability and Impact on a scale to understand where on the
Risk Matrix it lies.

• Probability:
(1-20)% means very low
(21-40)% means low
(41-60)% means medium
(61-80)% means high
(81-100)% means it is a fact

• Impact:
1 means negligible
2 means minor
3 means moderate
4 means significant
5 means severe
Risks of Institutions
• Market risk (Interest Rate, Foreign Exchange,
Liquidity, Commodity, Equity Price)
• Credit risk
• Country/sovereign risk
• Technology risk
• Operational risk
• Reputation risk
• Legal & Regulatory risk
• Business risk
• Environmental risk
• Social risk
Why is it difficult to implement sound risk
management policies?
 Dealing with the exposures
• Terminating Risk If an item presents a risk and can be changed or removed
without it materially affecting the business, then removing the risk should be
the first option considered; rather than attempting the treat, tolerate or
transfer it.

• Tolerating Risk is where no action is taken to mitigate or reduce a risk. This

may be because the cost of instituting risk reduction or mitigation activity is
not cost-effective or the risks of impact are at so low that they are deemed
acceptable to the business. Even when these risks are tolerated they should be
monitored because future changes may make it no longer tolerable.

• Treating Risk is a method of controlling risk through actions that reduce the
likelihood of the risk occurring or minimize its impact prior to its occurrence.

• Transferring Risk can be achieved through the use of various forms of

insurance, or the payment to third parties who are prepared to take the risk
on be half of the organization.
High profile corporate failures

• Enron
• Lehman Brothers
• CIFL
• Golden Key
Early warning signals from the Market
• Public confidence
• Stock price behavior
• Risk premiums
• Losses on sale of assets
• Declining profits
• Rating downgrades
• Excess borrowings
• Difficulty in meeting commitments
• Declining quality
• High employee turnover
Operational Risk
(Financial Institutions Management – Saunders & Cornett)

- The risk that existing technology or support systems

may malfunction or breakdown
The Enron Scandal
Technology Risk
(Financial Institutions Management – Saunders & Cornett)

- The risk that technological investments do not

produce the cost savings anticipated
- Leads to diseconomies of scale & scope (excess
capacity, redundancy, structural inefficiencies)
Technology Risks