The current state of risk management will be discussed. The current situation faced by many countries and the impact on businesses within these countries will be reviewed. This will be followed by a discussion and review of the structure of risk management and the introduction of the case studies.
Review of the current state of Risk Management
- The world-wide economic crisis. Its causes and effects.
- Going back to the beginning: a review of how the seeds were planted for the current crisis and how it spread throughout the world.
- The failures associated with risk management and the reactions.
- There are many failures that occurred in risk management programmes. These failures will be reviewed and discussed for their impact on the future of risk management.
- The future of risk management from both the legislated and practical aspects.
- Crisis Review
- The Nigerian Regulatory changes.
- In August 2009, the Central Bank of Nigeria (CBN) conducted a special audit of the Nigerian Banks, resulting in significant changes at approximately half of the Banks. Why did the CBN do this? What was the result?
- The Risk Management failures at BP.
- BP had a robust risk management programme. What went wrong and how did it lead to the failure in the Gulf of Mexico?
- The crisis in Greece.
- What caused the collapse of confidence in Greece?
- How did it affect the financial institutions in Greece?
- How do systemic issues affect financial institutions?
The concepts of risk
- Defining Risk A Primer
- How you define risk determines how you will measure and manage it. The discussion of risk will begin with the concepts of probability and certainty, with examples provided for each. Statistical concepts like correlations and coefficients will be reviewed in order to establish the set of definitions.
- Risk definitions will be presented and discussed with an emphasis on relating the definitions back to practical Enterprise Risk Management (ERM) and Value examples. The discussion will begin at the level of Systemic and Organization Specific Risk, as well as; Credit, Market and Operational Risk. A full group of subset definitions will be presented and covered.
- Cash flow volatility will be reviewed as a key determinant in building an ERM programme.
- The strategic plan is the basis for the risk management activities of the organization. This agreement between the Board of
- Directors and Management regarding future events and activities the company will participate in is critical to an effective ERM programme.
- Establishing the risk appetite quotient
- Using a case study as the basis, the development of the risk appetite will be focused on. This appetite, which links back to cash flow volatility, establishes the first set of parameters used by the organisation in the ERM programme. These parameters create the focus for ERM and is the first step in determining its effectiveness and influence in the company. Components of the risk appetite development include;
- Projected cash flows and profitability.
- The establishment of a hurdle rate for pending projects and established services.
- Correlations between different activities.
- Capital deployment and leverage.
- The current level of risk faced by the company.
- As a concurrent activity, it is important to build the baseline for ERM within the organisation.
Basel II, Solvency II and Capital Management.
On day 2, the significant changes imposed by the implementation of Basel II will be explored, as well as the insurance industrys Solvency II initiative currently being developed and implemented. Capital
- Basel II
- Defining Basel II Why was it developed? What are the changes being implemented? What does it mean for a financial institution?
- The role of capital in risk management.
- The three pillars of Basel II (to be explored in detail on day 3).
- Solvency II
- Defining Solvency II.
- Understanding the impact on the insurance industry.
- The different roles of capital.
- Capital management.
- Using capital management as a risk management tool.
Credit, Counterparty, Market and Operational Risk
On day 3, the specific risk categories will be covered. The principals of the regulatory oversight of Basel II and III will be addressed. Capital as a tool will be introduced.
- Credit and Counterparty Risk
- Building a credit risk programme. Refining your approach to credit risk management.
Stress testing the loan portfolio.
- Market Risk
- Understanding the concepts of market risk, including interest rate risk and liquidity risk.
- Illiquidity will be explored in conjunction with a rapidly changing market.
- Operational Risk
- Building and defining an Operational Risk Management programme.
- Operational risk analytics and their link to controls and audit.
- Basel III - The changes to capital requirements as a result of the crisis.
Using the Risk Management Programme for Value Creation
Circling back to Day 1, the linkage between ERM and Value Creation will be explored. Concepts like Economic Value Added (EVA) and Risk Adjusted Return of Capital are examined and applied to Risk Management.
- Capital: Its various definitions and how it is deployed in an organisation.
- EVA an overall view.
Case studies will be used throughout the programme to highlight the learning points.
Course summary and close