Chapter 1: Principles of Risk Management

Question 1

what is risk management?

Answer 1

the practice of using processes, methods and tools for quantifying and managing
these risks and uncertainties

Question 2

what does risk management focus on?

Answer 2

identifying what could go wrong, evaluating which risks should be dealt with, and implementing strategies to address those risks

Question 3

what are the key elements to a risk framework?

Answer 3

Risk policies and governance at board level, Risk oversight, Day-to-day risk management

Question 4

how does the overarching economy relate to risk management?

Answer 4

a firm has to understand the current and potential future patterns of human behaviour that
will affect the products or services it sells

Question 5

how does politics affect risk management and the risk profile within a firm?

Answer 5

1. A rise or fall in the markets in which firms invest.
2. An increase or decrease in demand for the products which the industry sells.
3. Changes to the legislative and regulatory environment in which financial services firms operate.

Question 6

what certain changes are firm susceptible in terms of market forces?

Answer 6

technology, consumer behaviour, inequality of wealth distribution, propensity to save, attitudes to living on credit, house prices and demographic changes

Question 7

what does cyber risk cover?

Answer 7

a broad range of risks that are related to the theft of, or damage to, information stored on (or exchanged between) computers, as well as the systems and websites that run on those computers.

Question 8

what effect do shocks and natural events have?

Answer 8

they have the potential to adversely affect the national, or
even the global, economy

Question 9

what risks can external stakeholder have on a firm?

Answer 9

parent company: Where the parent owns more than one business, it will take a ‘global view’ and this, at times, may cause it to question or alter the plans of its subsidiary firms.

Significant holdings by institutional investors: Institutional shareholders that own more than a certain percentage of a firm’s shares gain influence through voting rights

Large customers: If a firm has an over-reliance on a particular customer, then that relationship clearly needs to be
carefully managed.

Question 10

what is the key to managing stakeholder risk?

Answer 10

• build relationships at senior levels
• understand their agenda and how it may differ from the firm’s own agenda, and
• manage expectations with any new developments

Question 11

what do ESG risks arise from?

Answer 11

Environmental: climate change issues,
Social: human capital issues, product liability issues, stakeholder opposition
Governance: corporate governance issues, corporate behaviour issues

Question 12

what is PESTLE analysis?

Answer 12

analysis of the external macro environment in which a business operates. often performed as a brainstorm with internal and external experts.
* Political
* Economic
* Social
* Technological
* Legal
* Environmental

Question 13

what is business continuity planning?

Answer 13

the act of planning for disaster recovery and business
continuity

Question 14

what does Business Process Analysis involve?

Answer 14

examining each high-level business process, and describing both the internal low-level processes and external factors

Question 15

what is strategic risk?

Answer 15

the current or prospective risk to earnings
and capital arising from changes from adverse business decisions, improper implementation of decisions or lack of responsiveness to changes in the business environment

Question 16

what questions must be asked when considering risk strategy?

Answer 16

Is the strategy right?
Is the strategy being properly implemented?

Question 17

what is operational risk?

Answer 17

the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events

Question 18

what is financial risk?

Answer 18

credit, market and liquidity risks

Question 19

what does the assessment of internal drivers of risk include?

Answer 19

Risk assessment workshops, Discussion with external auditors, Stress testing, Scenario analysis

Question 20

what is the relationship between external forces and internal risks?

Answer 20

External forces very often give rise to internal risks, and so these interacting
external and internal risk drivers will need to be addressed simultaneously

Question 21

what methods are typically used to reduce the levels of business risk associated with developing and launching new products?

Answer 21

gap analysis of the firm’s strategy
Market surveys to establish external demand
research to understand similar products from competitors
R+D
Liaison with external stakeholders
Test marketing

Question 22

What is risk culture?

Answer 22

the system of values and behaviours present throughout an organisation
that shape risk decisions

Question 23

what are the key features of a healthy risk culture?

Answer 23

attitude to risk and ethics of the board and senior team, effective communication of risks, degree to which risks are considered in formal decisions, extent to which incentive schemes reinforce risk management

Question 24

what is the risk appetite?

Answer 24

the type and amount of risk that a firm is willing to accept in the pursuit
of its business objectives

Question 25

how is the risk appetite set?

Answer 25

through an iterative process

Question 26

What does the top down approach to setting a risk appetite involve?

Answer 26

the board and senior management

Question 27

What does the bottom up approach to setting a risk appetite involve?

Answer 27

line management and department managers

Question 28

what is inherent (gross) risk?

Answer 28

an assessment of risk without considering the beneficial effects
of mitigating controls

Question 29

what is residual (net) risk?

Answer 29

the firm’s exposure after having taken mitigating controls into
account

Question 30

what is a firms risk profile?

Answer 30

the type and intensity of the risks to which it is exposed

Question 31

what are types of risk mitigation techniques?

Answer 31

insurance policies, upgrading processes and IT, hedging, collateralising

Question 32

what is reputational risk?

Answer 32

an outcome itself or results as a direct or indirect consequence from other
risk classes. can subsequently cause other types of risk

Question 33

what is Credit Risk?

Answer 33

risk of loss caused by the failure of a counterparty or issuer to meet its obligations

Question 34

what is Market and Asset Liquidity Risks?

Answer 34

risk of loss arising from changes in the value of financial instruments

Question 35

what is Funding Liquidity Risk?

Answer 35

risk that a firm cannot obtain the necessary funds to meet its obligations as
they fall due

Question 36

what is Interest Rate Risk?

Answer 36

exposure of a firm’s financial condition to adverse movements in interest rates

Question 37

what is the nature of systematic risk?

Answer 37

Because of the tight interactions between firms across the whole financial services sector, risks that affect one firm, or a group of firms, can affect the stability of the whole financial system. This is known as contagion and it causes systemic risk

Question 38

how do regulators interact with firm due to systematic risk?

Answer 38

regulators treat banks differently from other firms, often working with national governments to keep a troubled bank operating but allowing a troubled securities firm or investment manager to fail.

Question 39

what is sovereign risk?

Answer 39

where the government takes on the debts and other obligations of a bank within their jurisdiction

Question 40

what is involved in a resolution plan?

Answer 40

credible recovery actions, mechanism by which any absolute failure within the firm can be enacted in an orderly fashion