Project Case Example: Risk Transformation
Risk management consists not just of risk measurement, but also applying the outputs of accurate risk measures and metrics into the day-to-day operations and business of the financial institution. In other words, risk measurement is the means to the ends of incorporating risk considerations into the management, strategy and culture of the institution.
With this in mind, Stamford embarked upon the journey of improving risk management with a key financial institution client more than 5 years ago:
1.The first stage was establishing the foundations of risk measurement – building risk measurement models, and validating and improving the existing risk models, policies and frameworks
2.Having gained the confidence of the business leaders with regards to the risk measures, the second stage was then to apply the risk measurement outputs to key risk controls, such as risk and exposure limits, delegation of approval authorities, and streamlining the credit processes to ensure that the loans and borrowers with the highest risk would get the most attention from the business leaders
3.The third stage was to further embed risk culture in every aspect of the business, and there is no better way to do this than to ensure that the performance of the businesses and bankers is measured not just in financial terms such as revenues and profits, but also in terms of the risks taken, for example using the concept of risk-adjusted profits
4.Finally, as the business leaders and bankers start taking notice of how their incentives were shaped in terms of risk-adjusted profits and revenues, the discussions on business strategy started to focus not just on market and financial strategy, but on risk strategy as well – how much risk the institutions was willing to take to achieve its profitability targets and how these targets were to be set
5.The institution, through the process of establishing risk measurement, risk controls, risk management and finally embedding these considerations in risk strategy, is now well on its way to developing a deeply ingrained risk culture throughout the organisation!