Effective Enterprise Risk Management Framework: Core Components
- April 29, 2021
- Quantivate
Modern business operates in a dynamic and constantly evolving world, with risks lurking around every corner. Organizations need to understand that their enterprise risk management framework and processes must encompass all aspects of the business and manage its changes efficiently over time.
For financial services firms, enterprise risk management (ERM) addresses not only common operational risks (such as accidental forfeitures), but also financial, strategic, legal, and other risk categories to maximize resources, reduce costs, and boost efficiency. ERM framework is designed to take a forward-looking view of the organizationās risks, objectives, and ability to manage uncertainty.
What Is an ERM Framework & Why Your Financial Institution Needs It
An enterprise risk management framework is a set of procedures and principles that help financial institutions manage risks to achieve their objectives. ERM frameworks help financial organizations to:
- Identify and analyze both internal and external risks
- Respond to risks in a consistent way
- Control risks
- Build a risk-aware culture helping their employees make informed decisions
- Implement risk management programs that comply with best industry practices as well as regulatory and institutional guidelines
- Prevent losses and unexpected outcomes
- Set strategic plans to approach risks
- Get employee buy-in for their risk management strategies
Setting the Foundation for a Strategic ERM Framework
When designing a unified ERM strategy, the discovery process begins with definition and identification. Institutions need to define the outcomes they seek to achieve and identify key pressure points of risks that need to be addressed. Strategic planning should also include delegating roles and responsibilities and determining policy language.
The internal environment encompasses the sentiments of the organization and establishes the foundation and framework for your institutionās risk culture. This includes how risk is viewed and addressed, risk management philosophy and parameters, risk tolerance, and integrity.
Objectives must exist before management can identify potential events affecting their achievement. Building an ERM program ensures that management has consistent processes to set objectives and verify that the chosen objectives support and align with the organizationās strategic mission and risk appetite.
6 Components of an Enterprise Risk Management Framework
To build an effective ERM framework, your organization needs to consider the following component of risk management:
1. Event and Risk Identification
Identify internal and external events affecting the achievement of objectives, distinguishing between risks and opportunities.
2. Risk Assessment
Analyze risks and their potential impact, establishing a baseline for deciding how various risks should be managed.
3. Risk Response
Management chooses risk responses and develops a set of actions to align ERM processes with risk tolerances and appetite.
4. Control Activities
Develop and implement policies and procedures to help ensure the risk responses are effectively executed.
5. Information and Communication
Identify, capture, and communicate relevant information through processes and timetables that enable stakeholders to carry out their responsibilities and, if necessary, report to leadership.
6. Continuous Monitoring
Maintain ongoing visibility into your risk landscape through tools and processes that break down data silos and deliver risk intelligence to stakeholders across your institution.
ERM thrives only when program ownership is shared across the entire organization and when core strategic goals are coordinated and communicated across departments. ERM can often feel too far-reaching and difficult to manage for financial institutions. However, a unified enterprise risk management framework built on a flexible technology architecture provides enhanced visibility, controls, procedures, and policies. A technology-enabled ERM program equips institutions with the tools and data they need to improve risk management, avoid compliance penalties, and protect the extended enterprise.