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The underlying premise of enterprise risk management is that every entity exists to provide value to its stakeholders.  All entities face uncertainty, and the challenge is to determine how much uncertainty to accept as it strives to grow stakeholder value.  Uncertainty presents both a risk and an opportunity with the potential to enhance or erode value.  Enterprise risk management enables Management to deal effectively with uncertainty and associated risk and opportunity, thus enhancing the capacity to build value.  Initiatives to build value with integrity should be aligned with an entity’s strategic high level goals and ethics, ensure the effective and efficient use of operational resources, provide for reliable reporting, and assure compliance with applicable laws, regulations and governance requirements.

Enterprise risk management is defined as a:

“process effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across an enterprise, designed to identify potential events that may affect the entity, and manage risk within its risk appetite, to provide reasonable assurance regarding the achievement of the entity’s objectives”.

This definition reflects certain fundamental concepts that enterprise risk:

  • is an on-going process applied across an entity
  • provides the opportunity to align the management of corporate strategic objectives and risk to deliver value with integrity
  • provides an entity level view of risk
  • is effected by people at every level of the organisation
  • is designed to identify failure points that affect the entity.

Shareholder value may be maximised when management sets strategy to strike an optimal balance between growth, financial goals and related risks, and efficiently and effectively deploys resources to achieve the entity’s objectives.  The objectives of Enterprise Risk Management include the:

  • alignment of risk appetite and strategy
  • ability to enhance key decisions made to respond to threats and risks
  • reduction of operational surprises
  • compliance with key regulatory & legal requirements enterprise-wide.

The primary drivers of operational risk are People, Relationships, Technology, Processing, Physical, and other External risks.  Entities that implement a coordinated enterprise-wide program of operational risk optimisation, and that link risk, control and performance measurement metrics, will be better equipped to avoid pitfalls and surprises on the way towards creating value with integrity.

You are invited to ask any question or raise any issue on this thread – just keep it relevant and keep it clean (and relevant to banking or risk management)!

There was a revised version of the Accord released on 15 November 2005. The revised version is available from the BIS website.
This is acting to add in the double defaults paper released in July and also to make some other changes related to market risk. There are also detail changes throughout the document.

Pillar 1
The changes incorporated may be important if you are dealing with credit risk mitigation techniques including the use of guarantees and / or VaR modelling (particularly as it relates to repos).
The new paras 284(i) to (iii), 307(i) and (ii) and 435 (i)  incorporate the main changes relating to commercial banks, with credit derivative treatment varied by the changes to 689. The trading / VaR changes are more spread out, but 687(i) and (ii) may be of particular interest.
Para 710 on government-traded paper under standardised has also changed, but the changes do not look large in an Australian context; AAA to AA- minus paper is still zero rated.

Pillar 2
Paras 738 and 778, relating to market risk, have been greatly expanded, adding in a lot more on stress testing and VaR use. Para 772 has been slightly changed and 777 has had major changes, both relating to credit and counterparty risk. There does not appear to be any other changes of any substance.

Pillar 3
There is a new table 8 in para 826 for disclosures relating to counterparty credit risk and some detail changes relating to the market risk disclosures in the old table 10 (now table 11), but no further changes of any substance.

My compare algorithm was getting a bit confused towards the end of the document, so this analysis should be treated as preliminary.

This proposal is designed to solicit interest for a blog to be set up to canvas bank risk management issues in Australia. It is not, and should not be, regarded as an official project of any bank or other organisation in Australian or overseas – more as an attempt to allow discussion of the issues as they arise. It should also be emphasised that this will be strictly informal and no reliance should be placed on this for any purpose whatsoever.

An assumption made throughout this paper is that the reader is familiar with the concept of a blog. If this is not the case, the reader is referred to the Wikipedia article on blogs for information.

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