Discover the 7 main improvement areas in Risk management in the coming years.

Boris Agranovich

This article is part of the series "Popular Risk Management". The aim of the series is to describe the main risk management topics in simple, clear and concise language. To stay updated on the recent trends, please make sure to check out our Risk Management Show podcast on the major podcast apps or via the following link:

During this time of crisis I studied many documents written by regulators, by big and small consultancy companies, I participated in different forums and I came to the conclusion that the following 7 improvement areas will shape the future of Risk management in the coming years. These areas are:

ERM or Enterprise risk management

Data quality


Business processes and organisation

Move from quantitative to qualitative measurement

Reporting requirements.

Area 1: ERM implementation.

Many organisations are starting the implementation of their ERM program. This will require a complete new thinking. Instead of managing different types of risk such as market risk, credit risk and operational risk as separate silos, financial institutions are bringing them together under a single enterprise-wide framework. It will also require a shift from business line aggregation to risk type aggregation of risks and exposures.

Area 2: Data quality.    

High-quality master and reference data are central to the success of an enterprise risk- management strategy. Each of the components of enterprise risk requires different levels of data input. Other important areas are workflow management and event reporting.

Area 3: Systems.

High-quality master and reference data are central to the success of an enterprise. In order to better manage risk, corporations need to bring together data from systems that in the past operated as silos and have seemingly little or no relation to each other. The main challenge in this area is to bring data from different transactional systems, involving different product lines and from different jurisdictions in such a way that data will remain relevant and consistent without duplication or integrity loss.

Area 4: Business processes and organisation.    

There will be more discussion about ‘risk appetite’ and  ‘risk tolerance’, which means a greater understanding that companies need to look at their risk culture. Currently they are not yet well embedded as a management concept. There will be a better appreciation that good communication and a learning culture, with openness, lack of blame and analysis of mistakes, is the key to effective risk management. The idea of risk management being embedded in the culture of organisation is central in this context.

Area 5: Move from quantitative to qualitative measurement.

One of the reasons of the current financial crisis was cited as over reliance on quantitative approach. The future measurements should combine efficient expert based judgment, risk governance or proper arrangement of roles and responsibilities, stress testing and holistic view of risks. In sound stress testing, management judgment and imagination are essential to determining the scope, likelihood and severity of stress test scenarios. (See “Principles for sound stress testing practices and supervision”, Basel Committee of banking Supervision).

Area 6: Strengthening of the reporting requirements.    

Authorities and boards require relevant and timely information concerning key risks that is captured by the risk reporting system to oversee the efficiency of the organisation’s risk management approach.   

Area 7: Convergence of Market and Operational risk.

Risk managers from different disciplines, especially from market and operational risk are working together to develop more forward-looking risk management approaches and techniques.

Market risk is data-driven and makes more use of the forward-looking tools such as scenario analysis and stress testing. In contrast to credit risk, which is still mainly driven by historical quantitative data, Operational risk did not produce sufficient historical data. Instead, the Operational risk has focused on using business specialists' knowledge and expertise to generate scenarios. These scenarios have been applied together with the existing data to produce risk measurements or projections of risk probability and severity.

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Written by Boris Agranovich