Wednesday, April 09, 2014

Enterprise Risk Management Requires Capable Operational Risk Management

People, Processes, Systems and Tools Ultimately Determine a Bank's Safety and Soundness 

A robust enterprise-wide system for managing bank risk is built on a strong foundation.  The strong foundation is comprised of four parts: People, Processes, Systems, and Tools to analyze external risks to the bank.  

The slide above is a picture of how bank directors and management should think about how to construct a strong Enterprise Risk Management system. At the top are banking’s 7 risk disciplines.  Each requires skilled bank experts.  In the middle is Enterprise Risk Management which is “owned” by the bank’s chief risk officer and CEO.  At the bottom are the four components of Operational Risk Management (ORM) which is the principal responsibility of bank directors in their exercise of effective governance.

Only a few banks in the United States have chosen to populate their boards with directors who are deep subject matter experts in such bank risk disciplines as credit, liquidity, compliance, or interest rates. Though there is evidence more banks are adding banking experts to their boards, the reality is that most banks lack such experts.  The principal reason few banks, especially community banks, have gone in this direction is because there is a shortage of people in the U.S. qualified as experts in these seven disciplines.  Another reason banks have not appointed such directors is because of a fear that highly skilled experts in the seven risk disciplines may struggle with role clarity.  Specifically, bank CEOs worry that directors who are deep subject experts in banking may start managing the bank versus governing it.  

However, as many bank boards learned during the Financial Crisis, the absence of deep subject expertise on the board does not relieve bank directors of the responsibility to evaluate the effectiveness of management’s skills and the bank’s processes used to manage the bank’s risks.  As this slide depicts, effective enterprise risk management is built on bedrock of skilled people using capable processes and systems.  Directors of all banks must be able to determine if their bank has capable PEOPLE who use capable PROCESSES and SYSTEMS to ensure the bank is effectively analyzing and responding to EXTERNAL EVENTS that threaten the bank’s safety and soundness. 

Written by Richard J. Parsons
Broke: America's Banking System

Richard J. Parsons is an Author, Speaker, Educator and Business Advisor in the Financial Services industry.  After a 31 year career at Bank of America, Rick founded the RJ Parsons Group in 2012. Rick published his first book in 2013, "Broke: America's Banking System - Common Sense Ideas to Fix Banking in America." He can be reached through his website or via social media including @RJParsonsGroup and LinkedIn.

1 comment:

  1. Operational risk managementis a daily struggle against uncertainty process.It helps to earn growth and revenue and maintain stability.