CH:25 Risk Governance

Question 1

What are the steps to the risk management process

6

Answer 1

• Risk identification
• Risk classification
• RIsk measurement
• Risk control
• RIsk financing
• Risk monitoring

Question 2

What are the benefits of effective risk management

Answer 2

• avoid surprises
• react more quickly to emerging risks
• improve stability and quality of their business
• improve growth and returns by exploiting risk opportunities
• improve growth and returns through better management and allocation of capital
• identify aggregate risk exposure and assess interdependencies
• integrate risk into business process (eg pricing) and strategic decision making
• give stakeholders business confidence that business is well managed

Question 3

What is systematic risk?

Answer 3

Systematic risk is risk that affects an entire financial market or system. Its is not possible to avoid systematic risk through diversification

Question 4

What is diversifiable risk?

Answer 4

diversifiable risk arises from an individual component of a financial market or system. A rational investor should not take on any diversifiable risk

Question 5

Why manage risk at a group level?

Answer 5

• pooling of risk
• diversification
• economies of scale
• better efficiency of capital

Question 6

What are the features of enterprise risk management? (3)

Answer 6

• consistency across business units
• holistic - considers risk of an enterprise as a whole, rather than in isolation
• seeking opportunities to enhance value

Question 7

Who are the stakeholders involved in risk governance of a company? (atleast 5)

Answer 7

• directors/ senior management
• risk managers and any Chief Risk Officer
• all other employees
• customers
• shareholders
• credit rating agencies
• regulators

Question 8

What are the 3 lines of defence in enterprise risk management?

Answer 8

• 1st line - line management staff in the business units
• 2nd line - Chief Risk Officer, risk management team
• 3rd line - the Board and audit function

Question 9

What are the responsibilities of the Central Risk Function and Chief Risk Officer

Answer 9

• give advice to the board on risk
• assess overall risk being run by the business
• make comparisons of the overall risks with the business risk appetite
• acting as a central focus point for staff to report new and enhanced risks
• giving advice to line managers about identification and management of risks
• monitoring progress on risk mamagement
• pulling whole picture together