Evolution of Risk Management & Expectations of Regulators

Summary

Since the financial crisis, risk management has evolved significantly with three key trends: an elevation in team stature, an increased reliance on data and models, and stronger governance. Risk management teams now have expanded resources and a direct link to the board. Regulators have emphasized data quality and governance, particularly through processes like the sea card. Effective challenge and open dialogue with business management are essential, as risk managers ensure proper mechanisms are in place for informed decision-making. This shift aims to enhance organizational resilience and decision-making, ultimately benefiting the company's long-term stability.

Takeaways

• 😀 The financial crisis led to significant changes in risk management, with increased resources and elevated status for risk management teams.
• 😀 Risk management teams now have a direct link to the board level, reflecting their importance in organizational decision-making.
• 😀 There has been a rise in the reliance on data and models in risk management, especially due to regulatory requirements like the sea card process.
• 😀 Regulators emphasize the importance of good data and robust governance around the models used in risk management.
• 😀 Governance in risk management has become more rigorous, supported by effective controls and meaningful management information systems.
• 😀 Risk management is now a central aspect of organizational resilience, with an increased focus on ensuring companies' robustness in uncertain conditions.
• 😀 Regulators are looking for risk management to be grounded in effective challenge, ensuring that all issues are raised and discussed openly.
• 😀 Risk managers play a role similar to the 'devil's advocate,' questioning and challenging business and management decisions.
• 😀 The goal of risk management is to make sure management has the best information to make the most informed decisions possible.
• 😀 Effective challenge within risk management ensures that the proper mechanisms and behaviors are in place to support the organization's decision-making process.
• 😀 Risk management is essential in making sure that all decisions are transparent, well-informed, and aligned with the long-term health of the organization.

Q & A

What are the three key trends in risk management since the financial crisis?

The three key trends in risk management are: 1) An elevation in stature and resources of the teams, often with a direct link to the board level. 2) Increased reliance on data and models, particularly driven by regulators. 3) A significant emphasis on rigorous governance, supported by effective controls and meaningful management information systems.

How has the role of risk management teams changed since the financial crisis?

Risk management teams have seen an elevation in stature, with their resources expanding significantly. This change often includes a direct link to the board level, emphasizing the growing importance of risk management within organizations.

Why has there been an increased reliance on data and models in risk management?

There has been increased reliance on data and models due to regulatory requirements, such as the sea card process. Liquidity management and the need for resilience in organizations have also pushed for more effective use of data, models, and governance around these tools.

What role do models and data play in demonstrating an organization's resilience?

Models and data help demonstrate an organization's resilience by providing accurate, reliable information that can be used to assess and manage risk, ensuring the organization is well-prepared for various challenges.

How important is governance in risk management?

Governance is extremely important in risk management. It ensures that the proper processes, controls, and behaviors are in place, allowing management to make informed decisions that enhance the organization's resilience.

What do regulators look for in risk management teams?

Regulators look for risk management teams to demonstrate effective challenge and governance. This involves working with the business to raise and address issues, ensuring that all perspectives are considered and that management has the best information to make decisions.

How does risk management help organizations make better decisions?

Risk management helps organizations by ensuring that proper mechanisms are in place to challenge the business's plans. By providing a framework for effective challenge, risk managers ensure that management has all the relevant information to make informed decisions.

What does the concept of 'effective challenge' mean in risk management?

Effective challenge in risk management refers to questioning and scrutinizing the business’s plans and decisions to ensure that all potential risks are identified and addressed. It helps to uncover all issues and ensures that management has a clear and accurate understanding of the situation.

Why is it important for risk managers to act as 'devil's advocates'?

Risk managers act as 'devil's advocates' to ensure that all issues are raised and discussed. This role helps uncover potential risks that might be overlooked, allowing for more informed decision-making and stronger organizational resilience.

How does the relationship between risk management and business leadership affect decision-making?

The relationship between risk management and business leadership is crucial for making informed decisions. Risk management provides the necessary checks and balances, ensuring that management has the best possible data and perspectives to guide their decisions.