Chapter 1 Flashcards
(24 cards)
Definition risk management
The practice of using processes, methods and tools for quantifying and managing these risks and uncertainties.
How is credit, market and liquidity risk managed
Financial transactions performed by the industry. including growth in income through investments e.g. stock markets;
borrowing by home owners (mortgages) and corporates (bonds) financed by savings e.g. 1/2 year fixed rate savings product investments.
What is investment risk
Managed for the benefit of the firm and clients.
Investment risk is the combination of risks involved in providing the ‘right’ level of return to investors.
What is Operational risk
Managing credit, market, liquidity and investment risks is subject to operational risks emerging from people, processes, systems and external events that firm must manage.
What is enterprise risk
A method of providing the firm with a succinct view of all risk information allowing senior team to make balanced, firm-wide risk decisions.
Risk information is reported up the chain of command.
Risk types are grouped together and reported collectively providing risk equivalent of firm’s accounting tools where balance sheet, P/L and cash flow statement enable focused view of firms finances.
What is strategic risk (internal)
Firm interacts wiht ‘real’ economy giving rise to strategic risks faced by every firm. Internal drivers of strategic risk are;
Firm’s chosen strategy, translation and execution of the firm’s strategy into it’s business model, financial management and internal compliance with externally imposed regulations and laws.
What is strategic risk (external)
Arises from changes in global economy, political area, competitive environment, social and market forces and tech innovation.
How is a ‘risk register’ used
Contains risk types and specific risks that are compiled and used by firms so that the risks and mitigating actions and controls can be understood, owned and monitored.
What is corporate governance & risk oversight
Tactical and strategic risk takers. CEO, directors and Senior managers formulate strategies to take risks and avoid others. strategy is communicated to those whose job is involved in the implementation. For this to work you need;
Firm must be properly governed to formulate and implement the strategy,
a process for implementing firm-wide risk framework to enable oversight of strategic and tactical risks to enable desired outcomes.
What is risk appetite
How much risk a firm is willing to take, and make sure that appetite isn’t exceeded, through formal controls and high-quality risk reporting.
‘Risk-culture’ of the firm is key in enabling risk appetite set by the board to be adhered to at all levels.
Difference between risk and uncertainty
Variability that can be quantified in terms of probabilities is risk and variability that cannot be quantified at all is uncertainty.
what is needed to quantify event’s probability of occurring
We need large amounts of observable and repeating data that can be grouped and analyzed.
this data is available for market and credit risk analysis and information mining and other techniques can be applied to it with useful consequences.
This difference shouldn’t prevent firms protecting themselves against negative consequences of less quantifiable events.
How do strategic or operational risks differ from other types
Have much less repeatable data because strategic and operational risks are often unique.
What does risk management focus on
Identifying what could go wrong, evaluating which risks should be dealt with, and implementing strategies to address those risks.
what are benefits of having identified risks in advance and formulating response plan
They will be better prepared and have a more cost-effective way f dealing with them if they do occur
What are the key elements of a Simple Risk Framework
- Risk policies and governance at board level
- Risk oversight: Performed by business unit with results and action plans reported to the independent risk management function, often organized by risk type and performing tasks;
Identifying risks, assessing risks, ensuring risks are apparently controlled and monitoring and reporting on the risks and their associated controls. - Day to day risk management: Must be owned by business units, not the risk function.
What causes external risk
Changes in:
- the global economy
- the political arena
- the competitive environment
- social and market forces
- environmental, social and governance factors
- technology and cyber security
- actions of stakeholders and 3rd parties
What does an economy consist of and what is it shaped by?
The interactions between individuals and firms, and the allocation of their limited resources to maximize their financial positions.
Shaped by human behaviour, whether as individual consumers or as collectively arranged organisations.
To judge economic risk what must a firm do
Understand the current and potential future patterns of human behaviour that will affect products or services that it sells.
During an economic boom, a failure to anticipate an imminent downturn will result in what?
Firms will continue to increase their stocks using current input prices of raw materials.
they will then find they have to reduce the prices of their finished goods to sell them in recession.
Financial services firms with securitized mortgages on their books will find it difficult to sell them if there was a fall in house prices.
What is Political risk
Wealth creation and its distribution is viewed differently by different parties.
Change in government will generally affect the financial services sector causing a rise or fall in the markets.
Depends upon the strategies expected to be implemented.
How can Political risk affect financial markets
- A rise or fall in the markets in which firms invest
- An increase or decrease in demand for the products which the industry sells
- Changes to the legislative and regulatory environment in which the firms operate.
How are firms affected by the performance of other companies
If a competitor gains a critical mass of market share, it may become too expensive for some of the other firms to continue servicing the remaining customers, forcing them to exit the market.
How are finance firms susceptible to changes in social and market forces
- Technological advances and their impact on products and their use
- Changes in consumer behaviour
- rising inequality of wealth distribution
- the propensity to save
- attitudes to living on credit
- house prices and their relationship to demographic changes.
