Enterprise risk management is extremely popular nowadays and mostly it’s used by banks and financial units. All these enterprises deal with not only their own income but also with money of clients, so they should be extremely attentive to risks. Bank enterprise risk management bases on the strategic bank management and different operative activities.
Banks operating activities are formed by:
- Forex money/market
- Securities
- Derivatives
- Loans
- Deposits
- Internal actives
All these things form specific approach for enterprise risk management for banks.
Bank enterprise risk management
Risks that banks meet can be divided into three main categories: credit risks, market risks and operational risks. Depending on with which category you can associate this particular risk; you should choose an appropriate decision making approach.
Here is the list of main methods and statistical approaches banks use for the risk mitigation process:
- Bayesian model
- Structural model with noise (Monte Carlo simulation)
- Statistical methods (Integrated Laplace approximation)
- Parametric and non-parametric covariance model
- Constant covariance models
- Exponentially-weighted covariance model
All these methods are the part of classical statistics and probability. However, modern banks start to use more and more such a popular framework as COSO ERM framework. Of course its use leads to the same approaches, described above, but still financial structure can standardize the part of risk analysis, and therefore not to struggle with each particular risk on an appropriate analyzing method.
Enterprise risk management for banks it’s a quite fragile mechanism. It can be used efficiently only if it’s properly implemented. Adaptation process of bank enterprise risk management can meet these challenges:
- Improvement of efficiency – achievement of higher efficiency results, approach unification.
- Regulatory environment issues – respect of the whole bunch of regulatory rules and laws, which are numerous for banks and other financial enterprises.
- Keeping up with business growth – adaptation of more complex approaches as the complexity and clients expectations grow up.
- Attracting talents – recruiting real professionals in the field of the enterprise risk management for banks.
- Management process transformation in order to efficiently work with new approaches.
- Preparation for the future risks mitigation.