Mod 32: Case studies

Question 1

State desirable characteristics of organisational learning processes

Answer 1

Characteristics of good organisational learning processes
Good learning processes enable an organisation to:
* be open to discuss their own past mistakes
* be able to learn from those mistakes
* be aware of the mistakes of others
* adopt industry best practices.

Question 2

List examples of good organisational risk learning processes

Answer 2

Organisational risk learning processes
* internal meetings of senior executives and managers
* examination of external events and problems
* visits to other institutions to benchmark practices
* building a widely accessible and searchable database of insights
* training new starters in risk management * recording losses in a risk event log
* reviewing important incidents and policy violations

Question 3

List Lam’s seven lessons learned

Answer 3

Lam’s seven lessons learned
1. know your business
2. establish checks and balances
3. set limits and boundaries
4. keep your eye on the cash
5. use the right yardstick
6. pay for the performance you want
7. balance the yin and the yang

Question 4

With regard to ‘know your business’, state the desired outcome(s)

Answer 4

Know your business

Desired outcomes:
* know your customer (especially in credit risk management)
* everyone must understand how their accountabilities affect the risks of the organisation
* business managers should know the risks in the business ©

Question 5

With regard to ‘establish checks and balances’, state the desired outcome(s)

Answer 5

Establish checks and balances Desired outcomes:
* stop any individual or group taking on too much risk
* diversify portfolio by counterparty
* diversify power across people and groups ©

Question 6

With regard to ‘set limits and boundaries’, state the desired outcome(s)

Answer 6

Set limits and boundaries
Desired outcome:
* individuals and the groups in the business know when to stop, eg trading, product, duration, equity market, VaR, stop loss, single counterparty, industry exposure, country limits, quality standards, business limits

Question 7

With regard to ‘keep your eye on the cash’, state the desired outcome(s)

Answer 7

Keep your eye on the cash
Desired outcome:
* special scrutiny is given:
1. to cash transactions and the storage of cash (with cross checking, authorisation and checks and balances to ensure fraud is picked up early)
2. where substantial profits are reported but little cash is produced (with checks on accounting policies needed)
©

Question 8

With regard to ‘use the right yardstick’, state the desired outcome(s) ©

Answer 8

Use the right yardstick
Desired outcomes:
* a diverse range of performance targets is employed so as not to motivate excessive risk taking
* use a balanced scorecard approach to avoid excessive focus on one aspect of the business
* management performance and risk reports cover a broad selection of information and aren’t overly focused on any particular aspect
©

Question 9

With regard to ‘pay for the performance you want’, state the desired outcome(s)

Answer 9

Pay for the performance you want

Desired outcomes:
* design reward structures that don’t incentivise excessive risk taking, or concentration on pursuance of one aspect of the business at the expense of another
* stop individuals earning significant sums of money in a short period from a single goal
* rewards should be based on a risk-adjusted-return, noting that actions today may expose a business to long-term risks
©

Question 10

With regard to ‘balance the yin and the yang’, state the desired outcome(s)

Answer 10

Balance the yin and the yang Desired outcomes:
* management have appropriate soft skills, eg senior management commitment to the business, good corporate values, open communication, training and development, reward staff to encourage a sense of community
* employees respect their company
* the soft side drives the risk-taking activities, and the hard side (rules, limits, reporting) supports risk management