RISK LIBRARY I-
Majo Major r Ris Risk k Cat Categ egor ory: y: 1) Envi Enviro ronme nment nt Ris Risk k 2) ro! ro!es ess s Risk Risk ") In#ormation In#ormation #or $e!isio $e!ision n Making Making Risk
IIII- %y&e y&e o# o# Ris Risk k 1) Envi Enviro ronme nment nt Risk Risk ' 1.1) Competitor 1.2) 1.2) Techn echnol olog ogy y Inno Innova vati tion on 1.3) Sensitivity 1.4) 1.4) Sove Sovere reig ign/ n/P Polit olitic ical al 1.5) Legal 1.) !eg"latory 1.#) In$"stry 1.%) .%) &ina inancia nciall 'a 'ar(e r(ets 1.) .) Cata Catast strrophic phic Loss oss 2) ro!e ro!ess ss Risk Risk ' 2.1) 2.1) *per *perat atio ions ns !is !is( ( 2.2) 2.2) +mpo +mpo,e ,erm rmen entt !is( 2.3) In-ormatio In-ormation n Processing Processing/T /Techn echnology ology !is( 2.4) 2.4) Inte Integr grit ity y !is !is( ( 2.5) 2.5) &inan inanci cial al !is !is( ( 2.) 2.) Pro$" Pro$"ct ct Pric Pricing ing !is( !is( 2.#) 2.#) Contra Contract ct Commi Commitme tment nt !is( !is( 2.%) Per-orm Per-ormance ance 'eas"rem 'eas"rement ent !is( 2.) 2.) lig lignm nmen entt !is !is( ( ") In#ormation In#ormation #or #or $e!ision $e!ision Making Risk -
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"(1) "(1)
RCES RCESS* S*ER ERA A%I+AL %I+AL $ECI $ECISI SI+ + MAKI+, MAKI+, RISK RISK ' "(1(1) "(1(1) ro.! ro.!tt ri!ing ri!ing Risk "(1(2) "(1(2) Contra!t Contra!t Commitment Commitment Risk "(1(") "(1(") er#orman!e er#orman!e Meas.rement Meas.rement Risk Risk "(1(/) "(1(/) A0ignm A0ignment ent Risk
"(2) "(2)
I+A+C I+A+CIAL IAL A+$ BSI+E BSI+ESS SS $ECI $ECISI SI+ + MAKI+, MAKI+, RISK RISK '
"(2(1) "(2(1) "(2(2) "(2(2) "(2(") "(2(") "(2(/) "(2(/) "(2(4) "(2(4) "(2(6) "(2(6) "(2(7) "(2(7)
B.get B.get an 0anning 0anning Risk A!!o.nting A!!o.nting In#ormation In#ormation Risk inan!ia0 inan!ia0 Re&orting Re&orting Eva0.ati Eva0.ation on Risk %a3atio a3ation n Risk Com&ensation Com&ensation an Bene5t Risk Investment Investment Eva0.ation Eva0.ation Risk Reg.0atory Reg.0atory Re&orting Re&orting Risk
"("(1) "("(1) "("(2) "("(2) "("(") "("(") "("(/) "("(/) "("(4) "("(4) "("(6) "("(6) "("(7) "("(7) "("( "("() ) "("(;) "("(;)
Environ Environment menta0 a0 S!an S!an Risk Risk B.siness B.siness ort ort#o0 #o0io io Risk Risk 8a0.a 8a0.ation tion Risk Risk B.siness B.siness ort ort#o0 #o0io io Risk Risk er#or er#orman! man!e e Meas.re Meas.rement ment Risk rgani rgani9at 9ation ion Str.!t.r Str.!t.re e Risk Risk Reso.r!e Reso.r!e A00o! A00o!ati ation on Risk 0ann 0annin ing g Risk ro.! ro.!tt Li#e Cy!0e Cy!0e Risk Risk
"(")
III- Risk $e5nitions Enviro nmen t Risk
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+nvironment ris( arises ,hen there are eternal -orces that co"l$ signi0cantly change the -"n$amentals that $rive ro"ps overall oectives an$ strategies an$ in the etreme p"t any segment o- the ro"p o"t o- "siness. %y&e o# Risk
$e5nition*s
Environment risk
arises -rom -ail"re to "n$erstan$ c"stomer ,ants -ail"re to anticipate or react to actions o- competitors over6 $epen$en $epen$ence ce on v"lnerale v"lnerale so"rces so"rces o- income income or -"n$s etc. 'anageme 'anagements nts ass"mptio ass"mptions ns ao"t ao"t the "siness "siness environment provi$e a critical starting point -or -orm"lating an$ eval"ating "siness strategies. I- (ey managers $o not have a common "n$erstan$ing o- the (ey environment ris(s the ro"ps strategic oectives ,ill not e -oc"se -oc"se$. $. 7eca"s 7eca"se e the high high sta(e sta(es s o- strate strategic gic erro error r manage managemen mentt m"st m"st have have ass"ra ass"rance nce that that the (ey (ey environmental environmental ass"mptions on ,hich its strategy is ase$ are consistent ,ith reality. reality.
Com&etitor Risk
ctions ctions o- competito competitors rs or ne, entrants 8conventiona 8conventionall an$ other,ise) other,ise) incl"$ing incl"$ing ne,ly merge$ merge$ entities entities 8e.g. 7an(s 7an(s sec"rities sec"rities 0rms ins"rance ins"rance companies companies asset asset manageme management nt companies companies etc.) etc.) to the mar(et mar(et threaten threaten ro"ps competitive a$vantage or even its aility to $ominate the mar(et. These actions incl"$e intro$"cing o- ne, pro$"cts to the mar(et improve pro$"ct 9"ality increasing increasing pro$"ctiv pro$"ctivity ity an$ re$"cing costs an$ recon0g"ring the val"e chain in the eyes o- the c"stomers.
%e!
The ro"p is not leveraging leveraging a$vancements in technology technology in its "siness mo$el to achieve or s"stain competitive competitive a$vantage or epose$ to the action o- competitors or s"stit"tes that leverage technology to attain s"perior 9"ality cost an$ /or time per-ormance in their pro$"cts services an$ processes.
Sensitivity Risk
*ver6commitment *ver6commitment o- reso"rces an$ epecte$ -"t"re cash :o,s threatens ro"ps capacity to ,ithstan$ changes in environment 8e.g. interest rates mar(et $eman$ changes in reg"lations etc.) -orces eyon$ its control. &or eample;
•
The ro"ps strategy to gro, rapi$ly epan$ geographically an$ invest in signi0cant high ris( lines o- "siness "siness can increase increase its sensitivi sensitivity ty epos"r epos"re e to "nepecte "nepecte$ $ economic economic reg"lator reg"latory y an$ mar(et mar(et $evelopments.
Systemic ris( -or 0nancial instit"tions is a -orm o- sensitivity ris(. It is the ris( that 0nancial $i>c"lties in one 0nancial instit"tion or a maor mar(et $isr"ption ,ill ca"se "ncontrollale 0nancial harm to other instit"tions or prevent the e=ective operation o- the 0nancial system generally. Sensit Sensitivi ivity ty ris( ris( also also res"l res"lts ts ,hen ,hen the ro"p ro"p is too in:ei in:eile le to change change in respon response se to change changes s in the environm environment. ent. I- the ro"ps "siness "siness processe processes s cannot cannot e aligne$ aligne$ to satis-y c"stomer ,ants an$ meet the challenges o- changing technological a$vances "nepecte$ competitor actions or other eternal environmental changes its aility to compete ,ill e signi0cantly a=ecte$. •
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%y&e o# Risk
$e5nition*s
Sovereign*o0iti! a0 Risk
$verse political actions in a co"ntry in ,hich the ro"p has investe$ signi0cantly or has entere$ into a signi0cant agreement ,ith co"nterparty s"ect to the la,s o- that co"ntry threaten the ro"ps reso"rces an$ -"t"re cash :o,s. &or eample possile nationali?ation epropriation o- assets ,itho"t compensation c"rrency loc(age or other restrictions co"l$ res"lt in signi0cant losses to the ro"p. Sovereign ris( is a re:ection o- a co"ntrys 0nancial stan$ing in the ,orl$ comm"nity an$ to some $egree a -"nction o- the co"ntrys political staility an$ historical per-ormance in meeting its international 0nancial oligations. The greater the proaility a government may impose -oreign echange controls th"s ma(ing it impossile -or a co"nterparty or -oreign s"si$iary to honor its commitments the greater is the sovereign ris(. &or eample; • •
•
Lega0 Risk
n instit"tion may e arre$ -rom $oing "siness in a co"ntry@ n iss"er/oligor may e arre$ y its government -rom ma(ing interest an$ principal payments on its $et@ Co"nterparty to a $erivative contract 8i.e. a s,ap) is arre$ y its government.
Changing la,s 8local an$ -oreign in co"ntries ,hich ro"p has operations threaten the ro"ps capacity to cons"mmate important transactions en-orce contract"al agreements or implement speci0c strategies an$ activities. Changes in la,s an$ litigation claims an$ assessments can also res"lt in increase$ competitive press"res an$ signi0cantly a=ect the ro"ps aility to e>ciently con$"ct "siness. &or eample "ncontrolle$ litigation an$ p"nitive $amages 8i.e. len$er liaility) can ca"se tremen$o"s "ncertainty in $ecision ma(ing an$ create potentially "nacceptale liailities -or "sinesses.
Reg.0atory Risk
Changing reg"lations 8local an$ -oreign co"ntries in ,hich the ro"p has operations) threaten the ro"ps competitive position an$ its capacity to e>ciently con$"ct "siness. This can res"lt in increase$ competitive press"res an$ signi0cantly a=ect the ro"ps aility to e>ciently con$"ct "siness. &or eample reg"lators can signi0cantly change the r"les o- the mar(etplace an$ thr"st entire in$"stries into a vastly $i=erent competitive environment 8e.g. the aility o- "niversal ro(ers to o=er -"ll range o- speci0e$ 0nancial services).
In.stry Risk
Changes in opport"nities an$ threats capailities o- competitors an$ other con$itions a=ecting the 0nancial services in$"stry threaten the attractiveness o- the entire in$"stry.
There are also other ris(s that can e roa$ly categori?e$ "n$er Ain$"stry ris(A eca"se they ten$ to a=ect $i=erent in$"stries in $i=erent ,ays;
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%y&e o# Risk
$e5nition*s •
•
•
Bemographic !is( 6 The ris(s that $emographic tren$s ,ill a=ect the in$"strys c"stomer ase .an$ ,or( -orce. Social/C"lt"ral !is( 6 The ,ay people live ,or( an$ ehave as cons"mers can a=ect the in$"strys pro$"cts an$ services. &or eample societys acclimati?ation to the internet ,ill impact the $elivery o- competitive pro$"cts an$ services etc. at"ral Bisaster !is( 6 Severe ,eather :oo$ing earth9"a(es an$ other nat"ral $isasters a=ect most in$"stries some more $irectly than others. &or eample ,eather a=ects mar(et $eman$ -or gas an$ electricity. Inclement ,eather that is o"t6o-6season also a$versely a=ects the citr"s in$"stry. This co"l$ signi0cantly impact the aility o- the orro,ers to pay their oligations.
&inally there is the ris( that an entire in$"strys p"lic image ,ill e tarnishe$ or $amage$ $"e to negative p"licity. &actors that can a=ect the image incl"$e i n$"stry consoli$ation -ail"res large $erivative losses etc. inan!ia0 Markets Risk
+pos"re to changes in the earnings capacity or economic val"e as a res"lt o- changes in 0nancial mar(et variales ,hich a=ect income epense or alance sheet val"es. &or eample; •
• •
The mar(et price o- 0nancial instr"ments 8e.g. investment sec"rities -oreign c"rrency $et instr"ments or commo$ities) 'ar(et rates ,hich in:"ence income an$ epenses 8e.g. interest rates c"rrency rates) n in$e 8e.g. a stoc( mar(et in$e) ,hich can a=ect either the price o- a 0nancial instr"ment or the val"e o- a commercial transaction s"ch as eport sales
&inancial mar(et epos"res can res"lt in s"stantial losses i- the epos"res are "nhe$ge$ or imper-ectly he$ge$. &inancial mar(ets ris( can e inc"rre$ in a n"mer o- $i=erent ,ays. &or eample; Diel$ !is( 6 +pos"re to changes in earnings as a res"lt o- :"ct"ations o- mar(et -actors 8e.g. interest rate changes c"rrency :"ct"ations etc.) ,hich a=ect income -rom "nhe$ge$ assets or the cost o- "nhe$ge$ liailities 8incl"$ing eec"tory contracts an$ other contingent epos"res). Price !is( 6 +pos"re to changes in earnings or net ,orth as a res"lt o- price level changes. Cre$it !is( 6 The epos"re to act"al loss or opport"nity losses as a res"lt o- $eterioration in the aility o- a co"nterparty to honor its oligations an$/or $eterioration in the collateral val"e. Li9"i$ity !is( 6 +pos"re to loss res"lting -rom the inaility to convert assets 8e.g. investment sec"rities receivales inventories) to an e9"ivalent cash val"e or to raise "nsec"re$ -"n$ing in a timely an$ cost6e=ective manner. Systemic !is( 6 +pos"re to loss as a res"lt o- a maor mar(et $isr"ption ,hich a$versely a=ects all participants in that mar(et 8e.g. the inaility to repatriate -"n$s hel$ in a -oreign co"ntry $"e to the -ail"re o- its 0nancial mar(ets an$/or an(ing system). Compleity !is( 6 +pos"re to loss res"lting -rom entering into comple transactions the str"ct"re an$ pricing o- ,hich are not completely "n$erstoo$. •
• •
•
•
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%y&e o# Risk Catastro&
$e5nition*s maor $isaster threatens the ro"ps or "siness "nits aility to s"stain operations provi$e essential pro$"cts an$ services or recover operating costs. The inaility to recover -rom s"ch events in a ,orl$ class manner co"l$ $amage the ro"ps rep"tation aility to otain capital an$ investor relationships. There are t,o so"rces o- catastrophic losses;
•
7rea($o,ns in any o- these areas can threaten the very s"rvival o- the "siness. The ris( o- catastrophic losses occ"rring overlaps ,ith other "siness ris(s that relate more speci0cally to the potential -or a$verse events i.e. Pro$"ct/Service Belivery +nvironmental Eealth an$ Sa-ety an$ Berivative !is(s.
•
RCESS RISK Process ris( is the ris( that "siness processes;
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re not clearly $e0ne$@ re poorly aligne$ ,ith "siness strategies@ Bo not per-orm e=ectively an$ e>ciently in satis-ying c"stomer nee$s@ an$ +pose signi0cant 0nancial physical an$ intellect"al assets to "nacceptale losses ris( ta(ing misappropriation or mis"se.
• • • •
The inter$epen$encies o- processes ,ithin a "siness/-"nction/entity an$ ,ith c"stomers an$ s"ppliers are a contri"ting -actor to process ris(. Be0cient o"tp"ts -rom one "siness process are $e0cient inp"ts to another. Process ris( incl"$es; %y&e o# Risks ERA%I+S RISK
$e5nition *perations ris( is the ris( that operations are ine>cient an$6ine=ective in satis-ying c"stomers an$ achieving ro"ps 9"ality cost an$ time oectives. C.stomer Satis#a!tion Risk
=.man Reso.r!es Risk
ro.!t $eve0o&ment Risk
lac( o- -oc"s on c"stomers threatens the capacity to meet or ecee$ c"stomer epectations. The conse9"ences o- $issatis0e$ c"stomers are severe F permanent loss o- repeat "siness $eclining reven"es an$ loss o- mar(et share. Githo"t a constant $rive to,ar$s c"stomer satis-action an$ contin"o"s improvement the ro"p ,ill neither "n$erstan$ nor accept the pro$"ct characteristics or service elements necessary to remain competitive an$ ,ill -ail to improve its pro$"cts an$ processes. I- the ro"p $oes not -oc"s on the root ca"ses o- c"stomer $issatis-action long6term gro,th may e impossile an$ s"rvival $o"t-"l. The personnel responsile -or managing an$ controlling a "siness process/-"nction/entity/ "siness "nit $o not possess the re9"isite (no,le$ge s(ill an$ eperience nee$e$ to ens"re that critical "siness oectives are achieve$ a signi0cant "siness ris(s are re$"ce$ to an acceptale level. Ina$e9"ate pro$"ct $evelopment threatens the ro"ps aility to 81) meet or ecee$ c"stomers nee$s an$ ,ants consistently over the long6term@ an$/or 82) the pro$"ct pro0taility $oes not meet the minim"m re9"irement o- the management or the pro$"ct is not pro0tale. The ro"ps pro$"ct $evelopment process creates pro$"cts that; • • • •
C"stomers $ont ,ant or nee$. re price$ at a level c"stomers are not ,illing to pay 'eet a nee$ "t are late in reaching the mar(et that a competitor reache$ 0rst. re not pro0tale or $o not meet the minim"m re9"ire$ y the management to meet sharehol$ers epectations.
The pro$"ctivity o- the pro$"ct $evelopment process is signi0cantly less than that o- the more innovative competitors ,ho are ale to achieve higher pro$"ctivity thro"gh a stronger c"stomer -oc"s -oc"se$ mar(eting -aster cycle time an$ longer pro$"ct li-e.
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%y&e o# Risks
$e5nition Ca&a!ity Risk
Ins">cient capacity threatens the ro"ps aility to meet c"stomer $eman$s or ecess capacity threatens the ro"ps aility to generate competitive pro0t margins. Capacity ris( has several $imensions; •
•
The e=ective pro$"ctive capacity o- the $elivery channel is not -"lly "tili?e$ res"lting in 0e$ costs sprea$ing over -e,er "nits an$ creating higher "nit costs an$ lo,er "nit margins. The e=ective pro$"ctive capacity o- the $elivery channel is not a$e9"ate to -"l0ll c"stomer nee$s an$ $eman$s res"lting in lost "siness.
on6compliance ,ith c"stomer re9"irements prescrie$ internal ro"p policies an$ proce$"res may res"lt in lo,er 9"ality higher pro$"ction costs lost reven"es "nnecessary $elays penalties 0nes emarrassment etc. s a res"lt o- a :a, in $esign or operation or $"e to h"man error oversight or in$i=erence the ro"ps processes $o not meet c"stomer re9"irements the 0rst time or $o not comply ,ith prescrie$ proce$"res an$ policies or contract"al oligations. Compliance ris( sometimes re-erre$ to as non6con-ormance ris( res"lt in lo,er 9"ality higher costs lost reven"es "nnecessary $elays an$ potentially lac( o- contract en-orceaility an$ losing c"stomer con0$ence. The ris( o- non6con-ormance also gives rise to pro$"ct/service $elivery ris( eca"se i- it is not $etecte$ an$ correcte$ e-ore a pro$"ct or service is $elivere$ to the c"stomer a pro$"ct or per-ormance -ail"re res"lts. Compliance ris( can lea$ to a $iminishe$ rep"tation re$"ce$ "siness opport"nities an$ lessene$ epansion potential. It can also increase epos"re to integrity ris( 8see AIntegrity !is(A) or occ"r as a res"lt o- empo,erment ris( 8see A+mpo,erment !is(A).
er#orman!e ,a& Risk
Inaility to per-orm at ,orl$ class levels in terms o- 9"ality costs an$/or cycle time $"e to s"6par operating practices compare$ to that o- the; competitors or recogni?e$ stan$ar$s/enchmar(s threatens the $eman$ -or ro"ps pro$"cts or services. "siness process $oes not per-orm at a ,orl$ class level eca"se the practices $esigne$ into the process are not optimal. Ghen compare$ to that o- the competitors or est o- class
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%y&e o# Risks
$e5nition per-ormers there is an "n-avorale per-ormance gap eca"se o- lo,er 9"ality higher costs or longer cycle times. Ghen c"stomers $iscover the alternatives provi$e$ y s"perior per-orming competitors they cease to p"rchase/ac9"ire the ro"ps pro$"cts/services. *ne reason -or the gap can e $"e to the elapse$ time et,een the start an$ completion o- a "siness process 8or activity ,ithin a process) ,hich is too long eca"se o- re$"n$ant "nnecessary an$ irrelevant steps. Cycle time can e meas"re$ -or all operations e.g. application cre$it processing -"n$ing an$ .monitoring etc. Cycle time ris( has many -orms. &or eample Competitors "sing time as a strategic ,eapon can pose a -ormi$ale threat i- they signi0cantly alter the cost str"ct"re o- the val"e chain to the en$ "ser. Total cycle time re$"ces the nee$ to tie "p cash lierating -"n$s -or gro,th opport"nities. &or eample; Provi$ing mortgage loans over the phone ,ith electronic cre$it scoring; Pre6approve retail Pre6approve retail cre$it -acilities -or retail c"stomers ,ith access ,ithin 24 ho"r noti0cation@ The "se o- technology to $eliver pro$"cts an$ services. &or eample the "se o- electronic home an(ing provi$ing c"stomer access to all acco"nts@ Provi$ing no hassle ne, transaction acco"nt set "p. The aility to eliminate arriers to estalishing ne, relationships ,ill provi$e instit"tions ,ith a competitive a$vantage. • • •
•
•
Reg.0atory Com&0ian!e Risk
!eg"latory compliance ris( arises -rom non6con-ormance ,ith la,s an$ reg"lations at the international co"ntry state an$ local levels that apply to ro"p or any o- its "siness "nits an$ its "siness processes. This ris( also arises in sit"ations ,here the la,s or reg"lations governing certain pro$"cts or activities o- the ro"ps clients may e amig"o"s or "nteste$. !eg"latory compliance ris( eposes the ro"p to sanctions 0nes an$ penalties an$ can lea$ to a $iminishe$ rep"tation re$"ce$ ran$ name val"e limite$ "siness opport"nities an$ lessene$ epansion potential.
B.siness Interr.&tion Risk
7"siness interr"ptions stemming -rom the "navailaility o- s">cient -"n$ing li9"i$ity in-ormation technologies s(ille$ laor or other reso"rces threaten the ro"ps or any o- its "siness "nits capacity to contin"e operations. The ro"ps capaility to contin"e critical operations an$ processes may e highly
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%y&e o# Risks
$e5nition $epen$ent on availaility o- certain in-ormation technologies s(ille$ h"man 8$i=erent -rom the E"man !eso"rces ris( that impe$es the capaility to6per-orm the h"man relate$ 7"siness Interr"ption !is( here is more $etrimental. to the etent interr"pting the "siness) an$ other reso"rces. I- -acilities people ,ith the re9"isite eperience an$ s(ills an$ other critical reso"rces ,ere not availale or i- critical in-ormation systems ,ent $o,n the ro"p ,o"l$ eperience $i>c"lty in contin"ing operations in the $esire$ manner. $vance$ $isaster recovery planning an$ testing is essential. 7"siness interr"ption can arise -rom acci$ents ,eather ,or( stoppages saotage an$ crisis an$ res"lts in $issatis0e$ c"stomers an$ loss o- reven"e pro0ts an$ competitive position. 7"siness interr"ption attri"tale to a loss o- critical in-ormation systems is $escrie$ as Availaility !is(A "n$er AIn-ormation Processing/Technology !is(A. ro.!t *Servi!e $e0ivery Risk
&a"lty or non6per-orming pro$"cts or services epose the ro"p to c"stomer complaints liaility claims litigation an$ loss o- reven"es mar(et share an$ "siness rep"tation. The ro"ps operations create ris( o- c"stomers receiving inacc"rate or "ntimely services. These -ail"res "s"ally occ"r as c"stomer complaints are not a$$resse$ on a timely asis. They can signi0cantly a=ect ro"ps rep"tation -"t"re epansion -ra"$ prevention controls an$ mar(et share.
=ea0t< Sa#ety Risk
&ail"re to provi$e a sa-e ,or(ing environment -or its personnel eposes the ro"p to compensation liailities loss o- "siness rep"tation an$ other costs.
an
Personnel health an$ sa-ety ris(s are signi0cant i- not controlle$ eca"se they epose the ro"p to potentially signi0cant ,or(ers compensation liailities. Gor(ers compensation la,s ,hich vary -rom co"ntry to co"ntry can res"lt in severe 0nancial losses i- respective operations $o not strictly comply ,ith them. Costs associate$ ,ith on site operating -acility acci$ents have risen $ramatically since the 1#Hs an$ have a -ar reaching impact on the employee his or her -amily an$ -rien$s an$ -ello, employees. The negative p"licity -rom highly visile h"man an$ other costs associate$ ,ith health an$ sa-ety iss"es also can create rep"tation loss -or an( ro"p. The ro"p an$ their respective managers co"l$ 0n$ themselves criminally liale -or -ail"re to monitor an$ provi$e a sa-e ,or(ing environment -or their employees. Bran +ame Erosion ,a& Risk
+rosion o- the ran$ name over time threatens the $eman$ -or the ro"ps pro$"cts or services. It is a ris( that the ran$ name ,ill lose its val"e over time to a "siness in "il$ing an$ retaining $eman$ -or its pro$"cts an$ services. ran$ name is a ,or$ symol or $evice 6 or any comination o- these F that i$enti0es a pro$"ct or service an$ $isting"ishes that pro$"ct or service -rom the pro$"cts or services o-
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%y&e o# Risks
$e5nition other 0nancial services instit"tions. The ris( can arise eca"se o- the occ"rrence o- other ris(s e.g. Pro$"ct/Services Belivery !is( or the social appearance ro"p compare$ to other competitors in the eyes o- the comm"nity or a comination o- them artnering Risk
Ine>cient or ine=ective alliance oint vent"res a>liate an$; other eternal relationships a=ect the ro"ps capacity to compete@ these "ncertainties arise cl"e to choosing the ,rong partner poor eec"tion ta(ing more than is given 8res"lting in loss o- a partner) an$ -ailing to capitali?e on partnering opport"nities. 'any companies to$ay are -oc"sing on core competencies an$ core "sinesses. They are reali?ing that it is very har$ to e Aall things to all peopleA partic"larly ,hen -ast reaction an$ spee$ to mar(et an$ opport"nity are ecoming increasingly important. Partnering ,ith other organi?ations to achieve the ro"ps oectives is emerging as a strategic enaler an$ ris( mitigation strategy. Ghile partnering can ta(e many -orms legally an$ str"ct"rally 8literal partnerships strategic alliances cost6sharing arrangements co6 ran$ing arrangements etc.) the essence is estalishing a relationship ,ith another organi?ation that is perceive$ to ene0t oth. Partnering can e "se$ to achieve any roa$ oective@ share ris(s re$"ce cost access ne, mar(ets enhance ran$ image accelerate !B an$ learning etc. Ine>cient or ine=ective alliance oint .vent"re a>liate an$ other eternal relationships a=ect the ro"ps capaility to compete. Partnering ris( has several $imensions; •
•
•
•
EM>ERME+% RISK
+mpo,erment ris( is the ris( that managers an$ employee; • • • •
Page 11 of 37
Choosing the ,rong partner potentially ca"sing rep"tation ris( an$ -ail"re to achieve oectives. +ec"ting poorly ,ith a viale partner $"e to c"lt"ral $i=erences comm"nications -ail"res etc. Ta(ing more than ,hat is given an$ losing a val"ale partner relationship eca"se m"t"ality o- interest is lost. &ailing to ta(e a$vantage o- an ovio"s opport"nity to partner.
re not properly lea$ Bo not (no, ,hat to $o 8or ho, to $o it) ,hen they nee$ to $o it +cee$ the o"n$aries o- their $e0ne$ a"thorities Bo not have the reso"rces training an$ tools necessary to ma(e e=ective $ecisions or
%y&e o# Risks
$e5nition •
re given incentives to $o the ,rong thing.
Leaers
The ro"ps or any o- its "siness "nits people are not eing e=ectively le$ to $o the right things ,hich may res"lt in a lac( o- $irection c"stomer -oc"s motivation to per-orm management cre$iility an$ tr"st thro"gho"t the organi?ation. Conse9"ences o- poor lea$ership incl"$e; •
•
Lac( o- c"stomer -oc"s res"lting in "siness processes that are "nresponsive to rapi$ly changing c"stomer re9"irements an$ ine=ective in satis-ying c"stomer nee$s@ o clear sense o- $irection or -"t"re p"ll that motivates (ey people to stretch themselves an$ ta(e the ris(s to; o o o o o o
• •
• •
Learn an$ (eep "p ,ith the pace o- change Bevelop ne, s(ills an$ competencies c9"ire ne, (no,le$ge See( an$ 0n$ opport"nities -or ne, mar(ets an$ pro$"cts $$ ne, an$ $i=erent val"e to eisting pro$"cts an$ services an$ Contin"o"sly improve "siness processes
Lac( o- management cre$iility an$ tr"st ,ithin the organi?ation +mployees -eel "nappreciate$ lac( inspiration an$ enth"siasm $ont -eel empo,ere$ to act $o not really (no, ,hat is epecte$ o- them an$ are too ,illing to accept A"siness as "s"alA People ,ithin the organi?ation are ine=ective in ma(ing cross6-"nctional teams ,or( The organi?ation is not s">ciently innovative to meet the competition.
Lea$ership is asol"tely essential to s"ccess-"l "siness ris( management change management "siness process reengineering an$ contin"o"s "siness process improvement.
A.t
Ine=ective lines o- a"thority may ca"se managers or employees to $o things they sho"l$ not $o or -ail to $o things they sho"l$. &ail"re to estalish limits on personnel actions may ca"se managers or employees to commit "na"thori?e$ or "nethical acts or to ass"me "na"thori?e$ or "nacceptale "siness ris(s.
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%y&e o# Risks
$e5nition &or eample senior management an$ the 7oar$ either 81) $oes not approve a transaction or $ecision or 82) $oes not speci-y the process an$ criteria y ,hich the transaction or $ecision is to e approve$; In $e0ning the responsiilities an$ a"thorities o- (ey employees management $oes not clari-y the terms or o"n$aries o- those responsiilities an$ a"thorities e.g. ,hat they can not or sho"l$ not $o. Clear o"n$aries an$ limits $e0ne$ in accor$ance ,ith a "siness ris( management strategy or pr"$ent "siness policy are important eca"se they create -oc"s restrict or precl"$e non6controllale "siness activities place caps on "nacceptale ris( ta(ing an$ losses in high ris( areas clari-y managements a"thori?ation criteria an$ $e0ne parameters -or corporate con$"ct. Gith respect to areas in ,hich signi0cant ris(s are ta(en or signi0cant assets are entr"ste$ to a -e, specialists 8e.g. $erivatives an$ e7"siness) management $oes not "n$erstan$ ,ho is $oing ,hat ho, o-ten an$ ,hy an$ the etent an$ magnit"$e o- the ris(s the6eperts ass"me on the ro"ps ehal-. 'anagers an$ employees are given responsiilities that are inconsistent ,ith the ro"ps oectives strategy an$ pr"$ent "siness ris( management practice. •
•
•
'anagers an$ employees $o not elieve they are empo,ere$ to act so they $o not act ,hen action is clearly ,arrante$. In these circ"mstances -ear an$ $istr"st may even e ,i$esprea$ in the organi?ation. .tso.r!ing Risk
*"tso"rcing activities to thir$ parties may res"lt in the thir$ parties not acting ,ithin the inten$e$ limits o- their a"thority or not per-orming in a manner consistent ,ith the organi?ations strategies oectives an$ $esire$ res"lts. There are t,o elements o- o"tso"rcing ris(. &irst there is the ris( that o"tsi$e not ,ithin their $e0ne$ limits o- a"thority an$ $o not per-orm in a manner consistent ,ith the val"es strategies an$ oectives ro"p). Secon$ there is the ris( that strategic "siness processes o"tso"rce$ "ltimately create competition -or the o"tso"rcing "siness "nits. &or eample; •
•
•
Page 13 of 37
TPs may settle or negotiate claims provi$e in-ormation technology services or other services o"tsi$e the limits estalishe$ y the ro"p. There may e a ris( that transactions o"tsi$e o- the TPs a"thority are cons"mmate$ "t not $oc"mente$ or that limits on the service provi$ers a"thority have not een properly $e0ne$ in the 0rst place. The motivation an$ activities o- a TP may not e consistent ,ith the strategic goals o- the ro"p. +mphasis or lac( o- emphasis on partic"lar pro$"cts services or 9"alities o- the ro"p may limit the e=ectiveness o- the TP or minimi?e the ro"ps s"ccess. I- the ro"p contracts ,ith the TP ,itho"t -oc"sing "pon the "ltimate c"stomers val"e
%y&e o# Risks
$e5nition
•
er#orman!e In!entives Risk
chain the ris( o- the TP competing -or "siness increases signi0cantly. &or eample o"tso"rcing the mortgage origination an$ servicing -"nction co"l$ allo, the thir$ party processor to compete on similar pro$"cts an$ service o=erings. The TP an$ its sta= are not hel$ to the same con$"ct an$ ehavioral stan$ar$s as are the employees o- the ro"p. +mployees o- the TP $o not "n$erstan$ or are not committe$ to same val"es mission an$ strategies o- the ro"p.
C
The people ,ithin the ro"p are "nale to implement process an$ pro$"ct/service improvements 9"ic(ly eno"gh to (eep pace ,ith changes in the mar(etplace. This may e $"e to lac( o- s(ill sets (no,le$ge or a $ynamic corporate c"lt"re.
Comm.ni!ations Risk
Ine=ective comm"nication channels may res"lt in messages that are inconsistent ,ith a"thori?e$ responsiilities or estalishe$ per-ormance meas"res. Comm"nications vertically 8top6$o,n an$ ottom6"p) or hori?ontally 8cross6-"nctional) ,ithin the ro"p are ine=ective an$ res"lt in messages that are inconsistent ,ith a"thori?e$ responsiilities or estalishe$ meas"res. s a res"lt managers an$ employees; •
•
•
•
Page 14 of 37
re con-"se$ as to ,hat the ro"p or "siness "nits mission oectives an$ strategies are. Bo not comm"nicate "p,ar$s ,hat senior managers nee$ to (no, to stay in to"ch ,ith ,hat is really happening in the "siness. Bo not receive timely $irection/"p$ate or co"nsel -rom senior management so that they -eel they are "ns"pporte$ an$ isolate$. Bo not have or ,ill not "se an employee response program s"ch as a Eotline Eelpline or $vice Line to otain a$vice an$ g"i$ance -rom a responsile company o>cial e-ore they act.
%y&e o# Risks
$e5nition •
I+RMA%I+ RCESSI+,* %EC=+L,Y RISK
In#ormation &ro!essing*te!
Irrelevant in-ormation create$ or s"mmari?e$ y an application system may a$versely a=ect $ecisions o- the "sers. !elevance ris( is the ris( that in-ormation is not relevant to the p"rposes -or ,hich it is collecte$ maintaine$ or $istri"te$. This ris( relates to the "saility an$ timeliness o- in-ormation that is either create$ or s"mmari?e$ y an application system. !elevance ris( ties $irectly to AIn-ormation &or Becision 'a(ing !is(A as it is the ris( associate$ ,ith not getting Athe right $ata/in-ormation to the right person/process/system at the right time to allo, the right action to e ta(enA. This ris( arises -re9"ently -rom a -ail"re to -"lly "n$erstan$ in-ormation nee$s an$ a lac( o- attention to timeliness iss"es.
Integrity Risk
Loss o- integrity in the management o- the in-ormation system in-rastr"ct"re may res"lt in "na"thori?e$ access to $ata irrelevant $ata or "ntimely $elivery o- $ata or loss o- integrity in the application systems that s"pport the ro"p "siness processes may res"lt in "na"thori?e$ incomplete or inacc"rate processing o- transactions. This ris( encompasses all o- the ris(s associate$ ,ith the a"thori?ation completeness an$ acc"racy o- transactions as they are entere$ into processe$ y s"mmari?e$ y an$ reporte$ on y the vario"s application systems $eploye$ y the ro"p or "siness "nit. These ris(s pervasively apply to each an$ every aspect o- an application system "se$ to s"pport a "siness process an$ are present in m"ltiple places an$ at m"ltiple times thro"gho"t the application systems ho,ever they principally mani-est themselves in the -ollo,ing components o- an application system; •
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Page 15 of 37
Bo not ,or( together cross6-"nctionally to contin"o"sly improve processes an$ satis-y c"stomers nee$s.
%y&e o# Risks
$e5nition
•
•
•
•
,ith the acc"racy an$ integrity o- reports 8,hether or not they are printe$) "se$ to s"mmari?e res"lts an$/or ma(e "siness $ecisions. +rror Processing 6 !is(s in this area generally relate to ,hether there are a$e9"ate processes an$ other system metho$s to ens"re that any $ata entry/processing eceptions that are capt"re$ are a$e9"ately correcte$ an$ reprocesse$ acc"rately completely an$ on a timely asis. Inter-ace 6 !is(s in this area generally relate to ,hether there are a$e9"ate preventive or $etective controls to ens"re that $ata that has een processe$ an$/or s"mmari?e$ is a$e9"ately an$ completely transmitte$ to an$ processe$ y another application system to ,hich it -ee$s $ata/in-ormation. Change 'anagement 6 !is(s in this area may e generally consi$ere$ part o- In-rastr"ct"re !is( "t they signi0cantly impact application systems. These ris(s are associate$ ,ith ina$e9"ate change management processes incl"$ing "ser involvement an$ training as ,ell as the process y ,hich changes to any aspect o- an application system is oth comm"nicate$ an$ implemente$. Bata 6 !is(s in this area may also may e generally roote$ -rom an$ consi$ere$ part o- In-rastr"ct"re an$/or ccess !is(s "t they signi0cantly impact application systems. These ris(s are associate$ ,ith ina$e9"ate $ata management controls incl"$ing oth the sec"rity/integrity o- processe$ $ata an$ the e=ective management o- $ataases an$ $ata str"ct"res.
Integrity can e lost eca"se o- programming errors 8e.g.. goo$ $ata is processe$ y incorrect programs) processing errors 8e.g. transactions are incorrectly processe$ more than once against the same master 0le) or management/process errors 8e.g. poor management o- the system maintenance process). A!!ess Risk
&ail"re to a$e9"ately restrict access to in-ormation 8$ata or programs in physical@ -orm or other,ise) may res"lt in "na"thori?e$ (no,le$ge an$ "se o- con0$ential@ in-ormation or overly restricting access to in-ormation may precl"$e personnel -rom per-orming their assigne$ responsiilities e=ectively an$ e>ciently. Inappropriate people may e ale to access con0$ential in-ormation. ppropriate personnel may e $enie$ access.. ccess ris( is pervasive i.e. incl"$es in-ormation -or any p"rpose 8e.g. rea$ copy etc).
ccess ris( -oc"ses on the ris(s associate$ ,ith inappropriate access to systems $ata or in-ormation. It encompasses the ris(s o- improper segregation o- $"ties ris(s associate$ ,ith. The integrity o- $ata an$ $ataases an$ ris(s associate$ ,ith in-ormation con0$entiality etc. ccess ris( can occ"r at any or all o- the -ollo,ing 0ve levels;
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%y&e o# Risks
$e5nition •
•
•
• •
et,or( 6 The mechanism "se$ to connect "sers ,ithin a processing environment. The access ris( in this area is $riven y the ris( o- inappropriate access to the net,or( itsel-. Processing +nvironment 6 The host comp"ter system ,here application systems an$ relate$ $ata are store$ an$ processe$ -rom. The access ris( in this area is $riven y the ris( o- inappropriate access to a processing environment an$ the program or $ata that are store$ in that environment. pplication System 6 The programs that are "se$ y "sers to process in-ormation that is relevant to their "siness processes. The access ris( in this area is associate$ ,ith inappropriate segregation o- $"ties that might occ"r i- access to systems ,as grante$ to person ,ith no clear "siness nee$. &or eample -e, people in a "siness "nit sho"l$ re9"ire access to ,ire trans-er a"thori?ation system. &"nctional ccess 8,ithin an application). &iel$ Level ccess 8,ithin a -"nction).
+istence o- ccess !is( relating to A-ail"re to a$e9"ately restrict accessA ,o"l$ mean the eistence o- Integrity !is( "t not the ccess !is( relating to Aoverly restricting accessA. I- the ccess !is( is roote$ -rom the system in-rastr"ct"re 8i.e. logical sec"rity an$ sec"rity a$ministration) its eistence ,o"l$ mean the eistence o- In-rastr"ct"re !is(. 7eca"se o- its pervasive an$ speci0c nat"re an$ the given ,i$er scope $e0nition it ,arrants itsel- a separate ris( category in the ris( $ictionary. Avai0a?i0ity Risk
c"lties 8e.g. $is( $rive rea($o,n operator errors). vailaility ris( -oc"ses on three $i=erent levels o- ris(; !is(s that can e avoi$e$ y monitoring per-ormance an$ proactively a$$ressing systems iss"es e-ore a prolem occ"r. !is(s associate$ ,ith short6term $isr"ptions to systems ,here restore/recovery techni9"es can e "se$ to minimi?e the etent o- a $isr"ption. !is(s associate$ ,ith $isasters that ca"se longer term $isr"ptions in in-ormation processing an$ ,hich -oc"s on controls s"ch as ac("ps an$ contingency planning. •
•
•
The ro"ps capaility to contin"e critical operations an$ processes may e highly $epen$ent on availaility o- certain in-ormation systems. I- critical or important systems ,ent $o,n -or an "nacceptale perio$ the ro"p ,o"l$ eperience $i>c"lty in contin"ing
Page 17 of 37
%y&e o# Risks
$e5nition operations. Critical an$ important in-ormation systems that are not availale to s"stain operations can res"lt in; loss o- reven"e cash :o, an$ pro0ts@ loss o- competitive a$vantage; $issatis0e$ c"stomers an$ loss o- mar(et share@ increase$ costs@ loss o- employee morale@ an$ even 0nes an$ sanctions. In#rastr.!t.re Risk
The ris( that the ro"p $oes not have an e=ective in-ormation technology In-rastr"ct"re 8e.g. har$,are net,or(s so-t,are people an$ processes) to e=ectively s"pport the c"rrent an$ -"t"re nee$s o- the "siness in an e>cient cost6e=ective an$ ,ell6controlle$ -ashion. These ris(s are associate$ ,ith the series o- In-ormation Technology 8IT) processes "se$ to $e0ne $evelop maintain an$ operate an in-ormation processing environment 8e.g. comp"ter har$,are net,or(s etc.) an$ the associate$ application systems 8e.g. loans $eposits etc.). The ris(s are generally consi$ere$ ,ithin the contet o- the -ollo,ing core IT processes; •
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Page 18 of 37
*rgani?ational planning 6 The ris( that; In-ormation technology plans are not integrate$ ,ith c"rrent an$ -"t"re "siness o plans res"lting in ina$e9"ate $ecision ma(ing an$ planning. IT personnel are ina$e9"ately organi?e$ to meet the nee$s o- the "siness. o IT personnel are ina$e9"ately traine$ in c"rrent or -"t"re technologies. o pplication system $e0nition an$ $eployment 6 The ris( that; +=orts to $e0ne "ser nee$s -or ne, systems sol"tions are ine=ective res"lting in o an inacc"rate or incomplete $e0nition or $esign. Concept"al $esigns are not a$e9"ate res"lting in A"il$ vers"s "yA $ecisions that o are ase$ on an incomplete "n$erstan$ing o- the -acts. Bevelopment e=orts are not planne$ or manage$ res"lting in ,aste$ e=orts o signi0cant cost overr"ns or possile aan$onment. P"rchase$ or $evelope$ systems $o not have the appropriate internal controls o to meet "siness "ser nee$s. Bevelopment e=orts $o not -ollo, a consistent approach -or con0rming "ser o satis-action an$ system -"nctionality res"lting in system sol"tions that $o not ,or( or $o not meet "siness nee$s.
%y&e o# Risks
$e5nition
•
•
•
to critical systems $ata or transactions 8either y company personnel or o"tsi$ers) res"lting in either the loss o- $ata/in-ormation integrity or $isclos"re an$/or mis"se o- con0$ential in-ormation. Comp"ter an$ net,or( operations 6 The ris( that comp"ters an$/or net,or(s are not e=ectively manage$ res"lting in per-ormance or capacity iss"es to "siness "sers. The ris( that critical processes per-orme$ y comp"ters an$/or net,or( operations personnel are not per-orme$ accor$ance ,ith $escrie$ proce$"res an$ time -rames res"lting in incomplete or inacc"rate in-ormation processing. Bata an$ $ataase management 6 The ris( that $ata an$/or $ataases lac( the integrity nee$e$ to s"pport "siness $ecisions or that en$ "sers $o not "n$erstan$ $ata s">ciently to s"pport their reporting an$ $ecision ma(ing nee$s. 7"siness/$ata centre recovery 6 The ris( that systems processes an$ $ata/in-ormation cannot e restore$ -ollo,ing a $isr"ption in a timely -ashion to s"pport the operating nee$s o- the "siness.
Lac( o- e=ective an$ ,ell6controlle$ "siness processes in each o- these areas are "s"ally the root ca"se o- ccess. !elevance an$ vailaility ris(s 8see other in-ormation processing/technology ris(s) an$ application systems process integrity ris(s 8see Integrity !is(). R,A+ISA%I+A L I+%E,RI%Y RISK
*rgani?ational Integrity ris( is the ris( o- management -ra"$ employee -ra"$ an$ illegal an$ "na"thori?e$ acts any or all o- ,hich co"l$ lea$ to rep"tation $egra$ation in the mar(etplace or even 0nancial loss. Its root ca"se is $i=erent -rom the Integrity !is( "n$er the In-ormation Processing/Technology !is( as it is originate$ -rom h"man or organi?ational ehavior. Management ra. Risk
'anagement -ra"$ 8e.g. intentional misstatement o- 0nancial statements) may a$versely a=ect eternal sta(ehol$ers $ecisions. 'anagement iss"es mislea$ing 0nancial statements ,ith intent to $eceive the senior management hol$ing company investing p"lic an$ the eternal a"$itors or engages in ries (ic(ac(s in:"ence payments an$ other schemes -or their o,n ene0ts or -or the ene0ts o- the "siness "nit or the ro"p.
Em&0oyee Risk
&ra"$"lent activities perpetrate$ y J employees in$ivi$"ally or in coll"sion ,ith c"stomers or s"ppliers perpetrate -ra"$ against the ro"p or "siness "nit -or personal gain 8e.g. misappropriation o- physical 0nancial or in-ormation assets) epose the ro"p to 0nancial loss. There is also potential -or legal epos"re negative p"licity 8emarrassment) an$ an a$verse impact on operations 8loss o- con0$ence y c"stomers s"ppliers or provi$ers o- 0nance). Illegal acts committe$ y managers or employees in$ivi$"ally or in coll"sion placing the ro"p its $irectors an$ o>cers at ris( to the conse9"ences o- their actions e.g. imprisonment 0nes sanctions s"spension o- "siness 8in a co"ntry ,ith a partic"lar
ra.
I00ega0 A!ts Risk
Page 19 of 37
%y&e o# Risks
$e5nition agency ,ith a speci0e$ class o- c"stomer or -or a speci0e$ gro"p o- pro$"cts) lost pro0ts loss o- c"stomers an$ $amage to rep"tation. This ris( ,ill eist together ,ith Compliance !is( i- the illegal act in 9"estion is eplicitly prohiite$ y the internal policies/g"i$elines or eternal reg"lations/la, provisions. na.t
•
Physical an$ 0nancial assets are "se$ -or "na"thori?e$ or "nethical p"rposes y employees or others. In-ormation an$ proprietary assets 8e.g. $esigns processes c"stomer lists in-ormation an$ (no,le$ge -orm"las pricing strategies an$ other tra$e secrets etc.) are compromise$ y in$"strial espionage res"lting in loss o- competitive a$vantage.
The eistence o- this ris( may e roote$ -rom the eistence o- ccess !is(. Re&.tation Risk
Bamage to the ro"ps rep"tation eposes it to loss o- c"stomers pro0ts employees an$ the aility to compete $"e to perceptions that it $oes not; • •
Beal -airly ,ith c"stomers s"ppliers an$ sta(ehol$ers. Kno, ho, to manage its "siness.
Loss o- c"stomers means the loss o- -"t"re reven"e streams. Loss o- employees means the loss o- the talent s(ills an$ epertise nee$e$ to r"n the "siness. Loss o- aility to compete may mean "ltimately going o"t o- "siness. The eistence o- this ris( may e $"e to the eistence o- other ris(s e.g. C"stomer Satis-action !is( 7"siness Interr"ption !is( an$ Integrity !is( I+A+CIAL RISK
Process ris( in a 0nancial contet arises ,hen operating policies an$ proce$"res $o not a$e9"ately control epos"re to the 0nancial mar(ets. Process ris( may res"lt in o"tright losses or in opport"nity costs eca"se 0nancial operations $o not s"pport the oectives o- the "siness in a cost6e=ective ,ay.
&inancial ris(s ,hich m"st e manage$ -all into three roa$ •
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'ar(et !is(
%y&e o# Risks
$e5nition • •
Li9"i$ity !is( Cre$it !is(
'!K+T !ISK
'ar(et ris( is the epos"re o- earnings or net ,orth to changes in mar(et -actors 8e.g. interest rates c"rrency rates in$ices) ,hich a=ect income epense or alance sheet val"es.
•
The eistence o- this ris( may e roote$ -rom the eistence o- ccess !is(. 'ar(et ris( is normally manage$ y the treas"ry -"nction altho"gh this may vary -rom organi?ation to organi?ation. &or eample the an(ing "siness has the treas"ry $epartment to manage $ealing an$ investment sec"rities the ins"rance "siness has a speciali?e$ investment $epartment to manage asset price ris(. Ghile monitoring an$ $ealing ,ith the eisting sec"rities the treas"ry -"nction may manage mar(et ris( as part o- its ac9"isition/tra$ing operations o- oth eisting an$ -"t"re sec"rities in the port-olio. +pos"re to mar(et ris( is typically eval"ate$ in terms o-; •
olatility 6 meas"re o- the proaility an$ magnit"$e o- :"ct"ations in prices or val"es -rom one time perio$ to another. olatility meas"res are tools -or assessing the impact o- mar(et ris(s on "siness per-ormance 8e.g. the sensitivity o- interest epense to changes in KLI7*! LI7*! an$ the Prime !ate).
n general ris( increases as volatility increases. &or eample short term interest rates are typically more volatile than long term rates ,hile some c"rrencies are s"stantially more volatile than others. B"ration 6 The ,eighte$ average mat"rity o- a set o- cash :o,s 8principal an$ all interest payments) an$ an estimate o- the sensitivity o- those cash :o,s to changes in mar(et prices. B"ration is typically "se$ as a tool -or assessing the ris( associate$ ,ith the $i=erent economic lives o- assets 8reven"es) an$ liailities 8epenses). &or eample $"ration can e "se$ to estimate the potential •
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%y&e o# Risks
$e5nition impact on net ,orth o- -"n$ing long term assets ,ith short or interme$iate term $et. In general 0nancial ris( increases ,ith $"ration i.e. the -"rther in the -"t"re a on$ is pai$ o"t the more volatile is its val"e. 'ar(et ris( management nee$s to e sensitive to; 'ar(et ris( management nee$s to e sensitive to; Berivative !is(
The ris( that a $erivative instr"ment $oes not achieve managements "siness oectives. *n the one han$ a $erivative instr"ment inten$e$ to e a he$ge may e inappropriately str"ct"re$ an$ create a spec"lative epos"re. lternatively in the c"rrent environment there is a signi0cant ris( that $erivatives are not "se$ ,hen their "se ,o"l$ improve yiel$s an$/or protect cash :o,s.
'o$eling !is(
+pos"re to loss as a res"lt o- mis6meas"rement o- price ris( partic"larly -or commercial or 0nancial epos"res ,hich re9"ire complete sim"lation mo$els or -or ,hich rea$ily oservale prices are not availale &inancial mo$els are only as reliale as their "n$erlying ass"mptions.
Interest Rate Risk
Signi0cant movements in interest rates a,ay -rom -orecasts epose the ro"p to higher orro,ing costs an$ lo,er investment yiel$s. Interest rate ris( incl"$es;
C.rren!y Risk
•
•
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The income ris( that a -"t"re spot interest rate ,ill $eviate -rom an epecte$ val"e res"lting in; o lo,er6than6epecte$ investment yiel$s or o higher6than6epecte$ orro,ing or $eposit costs. The val"ation ris( associate$ ,ith hol$ing a 0e$6yiel$ 0nancial instr"ment 8e.g. hire p"rchase loans ?ero co"pon on$s) ,hen mar(et yiel$s change. Interest rate ris( can res"lt in re$"ce$ earnings in asol"te terms or in a $eterioration o- the ro"ps competitive position in the in$"stry. There are $i=erent -orms o- interest rate ris( 8e.g. asis ris( yiel$ c"rve ris( sprea$ ris( etc.) ,hich are categori?e$ an$ $isc"sse$ elo, "n$er A&inancial Instr"ment !is(A. 7eca"se o- the nat"re o- its "siness changes in interest rates can a$versely a=ect the cash :o,.
%y&e o# Risks
$e5nition olatility in -oreign echange rates eposes the ro"p to economic an$ acco"nting losses. C"rrency ris( is the epos"re to :"ct"ations in echange rates an$ may arise as a res"lt o-; • • •
7"siness activities or operations in -oreign mar(ets. Investment in sec"rities iss"e$ y overseas entities. Investment in sec"rities ,hich are $enominate$ in a -oreign c"rrency.
+pos"re to c"rrency ris( means that the ro"p or "siness "nit is in a position to eperience an economic or acco"nting ene0t i- echange rates move in one $irection or s"=er an economic or acco"nting loss i- echange rates move in the other. &oreign c"rrency ris(s are generally classi0e$ as economic transaction an$ translation ris(s; +conomic !is( 6
C"rrency epos"re associate$ ,ith -"t"re cash :o,s incl"$ing; Strategic or The etent to ,hich the ro"ps c"rrency Competitive pro0le places it at a competitive a$vantage !is( or $isa$vantage in the event o- signi0cant changes in echange rates. Strategic epos"res may s"stantially ecee$ (no,n transaction vol"mes an$ may relate to c"rrencies in ,hich the ro"p has no $irect cash :o, epos"re. To eval"ate strategic ris( it is necessary .to eamine a roa$ range o- competitive practices incl"$ing the n"mer o- c"stomers in the in$"stry the -"nctional c"rrency o- in$"stry competitors an$ mar(et $eman$. et !is(
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'onetary
+pos"re to echange gains or losses on monetary assets or liailities o- -oreign operations ,hich are $enominate$ in a c"rrency other than the -"nctional c"rrency o- that operation 8e.g. <.S. $et hel$ y Eong Kong operations). et monetary
%y&e o# Risks
$e5nition epos"res may have ta conse9"ences in the -oreign co"ntry as ,ell as cash :o, conse9"ences i- assets or liailities are converte$ into the local c"rrency. Transaction !is(s
+pos"re to movements in echange rates on speci0c cash :o,s. The longer an epos"re is o"tstan$ing the greater the ris( o- "n-avorale c"rrency movements. Transaction ris(s incl"$e; &irm Commitment !is( 8incl"$ing $ivi$en$s)
Translation !is(
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+pos"re et,een contract"al commitment in a -oreign c"rrency an$ the $ate o- settlement. &or eample a contract"al commitment may re9"ire settlement o- the transaction in a -oreign c"rrency at a speci0e$ or "nspeci0e$ -"t"re $ate. Transaction epos"res are the e=ects o- c"rrency movements on the ro"ps o"tstan$ing 0rm commitments. This ris( also incl"$es anticipate$ cash trans-ers over the -oreseeale -"t"re 8generally ,ithin the net 1261% months) -rom a s"si$iary ranch or "siness "nit operating in a -oreign co"ntry ,hich creates c"rrency epos"re -or oth the remitting entity an$ the parent.
7"$get !is(
+pos"re to income loss as a res"lt o- c"rrency rates ,hich $i=er -rom the ass"mptions incl"$e$ in the corporate "siness plan.
Cash &lo, !is(
+pos"re to cash :o, changes as a res"lt o- -oreign taes on income in a -oreign c"rrency ,hich is not re:ecte$ in earnings in the ro"ps home or reporting c"rrency.
+pos"re to a$verse e=ects on the 0nancial statements as a res"lt o- c"rrency :"ct"ations. The metho$ o- translating -oreign c"rrency 0nancial statements into the reporting c"rrency may signi0cantly a=ect net margins net asset an$ liaility positions an$ net e9"ity positions.
%y&e o# Risks
$e5nition ED.ity Risk +9"ity ris( is the epos"re to :"ct"ations in the income stream -rom an$/or val"e o- e9"ity o,nership in an incorporate$ entity as a res"lt o- investment in shares o- p"licly tra$e$ entities private placements etc. It may arise as a res"lt o-; •
• • • •
Commoit y Risk
Investment in shares o- p"licly tra$e$ entities incl"$ing hol$ings in a port-olio o- e9"ity sec"rities. Investment in private placements. Investment hol$ings o- $et convertile into e9"ity. &oreclos"re o- collateral. !epayment o- $ets via iss"ance o- e9"ity shares y the oligors in $et restr"ct"ring.
Commo$ity ris( is consi$ere$ either a 0nancial mar(ets ris( or operational ris( $epen$ing on the in$"stry. s an operational ris( commo$ity ris( is the epos"re to :"ct"ations in prices o- commo$ity6ase$ materials or pro$"cts. 7eca"se commo$ities are at the margin a s"stit"te -or money commo$ity price ris( is o-ten consi$ere$ a 0nancial mar(ets ris(.
+amples o- commo$ity price ris( -rom the perspective o- a 0nancial instit"tion; •
•
Ghen the ro"p chooses to invest in gol$ -"t"res or options to implement a $iversi0cation strategy -or managing investment ris(. The len$ing epos"re o- sec"re$ agric"lt"ral loans to -alling commo$ity prices.
The epos"re o- $erivatives/tra$ing port-olios to changing prices o- "n$erlying commo$ities 8commo$ity -"t"res contracts commo$ity s,aps etc.) inan!ia0 Instr.ment Risk
&inancial mar(et ris( can vary $epen$ing on the partic"lar segment o- the mar(et to ,hich the hol$er o- a 0nancial instr"ment is epose$ or the ,ay in ,hich the epos"re is str"ct"re$. These ris(s incl"$e; nticipate$ +pos"re !is(
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&inancial epos"re associate$ ,ith -"t"re events ,hich are highly proale "t not contract"al e.g. the impact o-
%y&e o# Risks
$e5nition echange .rate :"ct"ations on cash :o,s ,hich are highly certain "t -or ,hich no contract"al commitments are in place 8e.g. pro0ts -rom a "siness "nit operating in a -oreign co"ntry). Typical epos"res arise in con"nction ,ith interest rates associate$ ,ith -"t"re orro,ings or investments. Diel$ C"rve The yiel$ c"rve $escries the relationship et,een the !is(/Diel$ yiel$s an$ the term to mat"rity o- a 0nancial instr"ment. Shape !is( Diel$ C"rve/Diel$ Shape !is( is the ris( that .the slope o- the c"rve ,ill change signi0cantly -rom the ro"ps/"siness "nits epectations at the time it planne$ its 0nancial strategies. +amples o- yiel$ c"rve ris( incl"$e a steep increase in the cost o- -or,ar$ c"rrency he$ges eca"se o- increases in one year interest rates. 7asis or Sprea$ !is(
+pos"re to changes in the price/yiel$ $i=erential et,een t,o 0nancial mar(ets or instr"ments 8e.g. a change in the ris( premi"m on corporate on$s relative to treas"ries o- the same mat"rity or et,een t,o :oating rate i n$ees). In a corporate environment asis ris( o-ten re-ers to the resi$"al 0nancial ris( that remains a-ter a 0nancial he$ge has een p"t in place. &or eample in the case o- interest rate s,aps the asis is the $i=erence et,een t,o :oating rate In$ees. 7asis ris( is the ris( that the :"ct"ation in the t,o in$ees is less than per-ectly correlate$. Th"s the ro"p may convert :oating rate $et to 0e$@ asis ris( eists i- the s,ap pays LI7*! ,hile the "siness "nits -"n$ing strategy is ase$ on <.S. CP rates.
*ption !is( 8also re-erre$ to is Contingent or t67i$ !is() Time Lag !is(
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+pos"re to $iscontin"o"s changes in cash :o,s or income as a res"lt o- option6type contracts ,hich may e eme$$e$ in other 0nancial instr"ments or ac9"ire$ on a stan$6alone asis. +pos"re to price changes -rom the time the $ecision to Invest/orro,/"y/sell occ"rs an$ the eec"tion o- the transaction.
%y&e o# Risks
$e5nition !einvestment /!e0nancing !is(
+pos"re to changes in the general level o- interest rates as a res"lt o- a mismatch in the timing at ,hich assets an$ liailities are -"n$e$ i.e. changes in the general level o- prices an$ yiel$ et,een the initial investment to the $ate at ,hich the cash :o,s -rom are investment are $"e to e reinveste$.
!ollover !is(
!ollover ris( $escries epos"re to an a$verse change in the yiel$s/prices availale in a given mar(et at a given moment in time !ollover ris( typically arises ,hen orro,er or investor m"st reprice a signi0cant cash :o, on a single $ate or ,ithin a very short perio$ o- time. he$ging strategy in ,hich all s,aps are reprice$ on the same $ay each 9"arter leaves the ro"p v"lnerale to rate s,ings $"e to mar(et or 0nancial ne,s or to $ealer A9ree$A. !ollover ris( increases signi0cantly i- the repricing position has a material impact on income or epense. Implementing the he$ging strategies y loc(ing into massive positions that roll over at pre$ictale times to maintain he$ging coverage may epose the ro"p to tra$ers ,ho learn o- this strategy an$ "se that (no,le$ge to pro0t at the ro"ps epense.
Berivative !is(
LiD.iity
The ris( that a $erivative instr"ment $oes not achieve managements "siness oectives eca"se; It is inten$e$ to e a he$ge "t is inappropriately o str"ct"re$ an$ creates a spec"lative epos"re. It is not "se$ ,hen its "se ,o"l$ improve yiel$s o an$/or protect cash :o,s. This sit"ation arises ,hen a c"rrency interest rate commo$ity or e9"ity epos"re sho"l$ e he$ge$ "t is le-t epose$ res"lting in signi0cant losses to the ro"p.
LiD.iity risk is t
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%y&e o# Risks
$e5nition "siness "nits operating re9"irements an$ other oligations. *perating re9"irements $et service capital epen$it"res an$ other cash o"t:o,s can re9"ire premat"re li9"i$ation o- assets ,hich can lea$ to re$"ce$ yiel$s an$/or "nplanne$ reali?e$ gains or losses. Cas< Risk
0oF The inaility o- the ro"p or "siness "nit to -"n$ its operational or 0nance oligations ,hich in etreme cases may lea$ to $e-a"lt or loss o- "siness. &or eample; •
•
&&ort.nity Cost Risk
The "se o- -"n$s in a manner that lea$s to the loss o- economic val"e incl"$ing time val"e losses transaction costs an$ other ca"ses o- loss o- val"e incl"$ing; •
•
•
Con!entratio n Risk
The an( or the 0nance company or the merchant an( is "nale to meet its net -"n$ing re9"irements. Changes in interest rates an$ economic con$itions can a$versely a=ect the "siness that is highly leverage$ increasing li9"i$ity ris(.
Time val"e losses $"e to $elays in investment o- -"n$s etc. The conse9"ences o- these $elays co"l$ res"lt in some s"si$iaries orro,ing ,hile others are investing. Transaction costs $"e to inappropriate or ine>cient management o- cast :o,s 8e.g. the nee$ to orro, high cost -"n$s or sell sec"rities at a loss eca"se o- the -ail"re to match the mat"rities o- short6term investments to settlement $ates on operational or 0nancial oligations). *ther ca"ses o- loss o- val"e incl"$ing in$i=erence to yiel$6 enhancement strategies an$ ine=ective yiel$6c"rve management. +arnings epos"re ,hen -"n$s are investe$ in a manner that $oes not generate s">cient ret"rns to cover costs pro0ts an$ ris(. Investment losses res"lt -rom the -ail"re to otain an a$e9"ate ret"rn given the $egree o- ris( ,hich is inc"rre$.
The ris( o- loss res"lting -rom the inaility to li9"i$ate 0nancial mar(et epos"res a AthinA mar(et. &or eample;
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%y&e o# Risks
$e5nition
•
•
•
Creit Risk
c"lt to 0n$ a co"nterparty ,illing to enter into a transaction in a timely manner. +cessive reliance on a small n"mer o- -"n$ing so"rces ,hich may leave the ro"p or "siness "nit v"lnerale to pre$atory pricing or inaility to *tain -"n$s ,hen nee$e$.
Cre$it ris( $escries the epos"re to act"al loss or opport"nity cost as a res"lt o- the $e-a"lt or other -ail"re to per-orm) y an economic or legal entity 8the $etor *r oligor) ,ith ,hich the ro"p $oes "siness. Cre$it ris( is the ris( o- toss arising eca"se co"nterparties -ail to per-orm accor$ing to their contract"al oligations. This is accent"ate$ y position concentration ,ith gro"p o- co"nterparties an$ increases in importance ,ith the sophistication an$ $iversity o- mar(et players. Cre$it ris( management is typically $riven y re9"irements -or control over the 9"ality o- c"stomer ase. The ro"ps cre$it management an$ collection policy sho"l$ appropriately alance the tra$e6o= et,een 8a) maimi?ing service/loan vol"me an$ 8) minimi?ing loss -rom "ncollectile acco"nts. I- this process -or eval"ating cre$it ris(@ $oes not ,or( e=ectively it can constrain "siness gro,th or create "nacceptale cre$it ris(s incl"$ing ecessive ,rite6o=s an$ collection costs. $e#a.0t Risk
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Be-a"lt o- a co"nterparty or oligor on a contract eposes the ro"p or "siness "nit to 0nancial loss. Be-a"lt !is( can e -"rther analy?e$ into the -ollo,ing; Belivery !is(
n entity ,hich has ta(en cre$it -acilities or $eliver o- services $e-a"lts on the payment an$/or goes into an(r"ptcy.
Iss"er !is(6
n entity ,hich has iss"e$ $et sec"rities hel$ in an operating s"rpl"s acco"nt or pension -"n$ port-olio $e-a"lts on the payment o- mat"ring $et an$/or goes into
%y&e o# Risks
$e5nition an(r"ptcy.
Co"nterpar ty or 'ar(et !is(
tra$ing partner is "nale to -"l0ll oligation on a contract 8e.g. a s,ap or a -or,ar$ commo$ity contract) on ,hich there is a positive mar(6to6mar(et val"e -or the $e-a"lting party. &or eample co"nterparties agree to ma(e perio$ic payments to an interme$iary instit"tion p"rs"ant to a s,ap agreement. The agreement speci0es the c"rrencies to e echange$ 8,hich may or may not e the same) the rate o- interest applicale to each 8,hich may e 0e$ or :oating) the timetale y ,hich payments are to e ma$e an$ other provisions $e0ning the relationship et,een the parties. S,ap interme$iaries are in$epen$ently oligate$ to all their co"nterparties e.g. even tho"gh a $ealer may e vie,e$ as an interme$iary et,een en$ "sers its oligation to each en$ "ser co"nterparty is in$epen$ent o- its oligations to the others. Some in$"strial company c"stomers "se $erivatives to he$ge some "siness ris( they $o not ,ant 8s"ch as the ris( o- an increase in interest rates or a -all in the val"e o- a c"rrency). The ris( is passe$ on to a $ealer ,ho in t"rn may he$ge it ,ith a separate contract ,ith another $ealer an en$ "ser or a spec"lator ,ho accepts 8he ris(. These co"nterparties typically incl"$e other commercial an(s an$ merchant an(s other in$"strial companies ins"rers an$ other 0nancial services 0rms etc. I- a co"nterparty to a contract -ails to per-orm its oligations as $e0ne$ "n$er that contract the $ealer m"st see( a replacement s,ap ,ith terms i$entical to those o- the $e-a"lte$ s,ap. I- the $ealer is "nale to 0n$ a replacement it inc"rs a 0nancial loss -rom the $e-a"lt.
7eca"se o- the si?e o- most $ealers 8e.g. the ig commercial an(s an$ the maor sec"rities 0rms) most en$6"sers consi$er the ris( o- $ealer $e-a"lt negligile.
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%y&e o# Risks
$e5nition Eo,ever a crisis at a maor $ealer co"l$ trigger a mar(et $isr"ption ,hich ,o"l$ a$versely a=ect all participants in the mar(et. See also Systematic !is( "n$er &inancial 'ar(et !is(. Con!entration Risk
Sett0ement Risk
The ris( o- ecessive loss $"e to) inappropriate emphasis o- sales vol"me or !even"es on a single c"stomer in$"stry co"ntry or other economic segment. Bi=erent settlement times et,een the capital mar(ets o- the gro"p an$ its co"nterparties epose the gro"p to a short term ris( o- co"nterparty $e-a"lt on oligations. In a 0nancial contet settlement ris( 6 also calle$ A$elivery ris(A 6 arises ,hen 0nancial co"nterparties e=ect their payments to each other at $i=erent times or in $i=erent locations. The 0rst paying party is epose$ to the ris( that the later paying party ,ill -ail to per-orm $"e to $elay system -ail"re or $e-a"lt. In essence one party per-orms its oligations "n$er the contract "t has not yet receive$ val"e -rom its co"nterparty. Settlement ris( is typically short6term 8less than 24 ho"rs). &or eample 8Eong Kong capital mar(ets close -or the $ay e-ore the <.S. mar(ets open res"lting in $elivery ris( to the <.S. co"nterparty on a s,ap at the time o- the principal echange. Settlement ris( ecomes $e-a"lt ris( i- a co"nterparty $e-a"lts $"ring the settlement cycle.
CLA%ERAL RISK
This is the ris( that the val"e o- an asset provi$e$ as collateral -or a loan lease or commitment may e partially or totally lost. &or eample; •
•
•
•
•
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Signi0cant $eclines in real estate or e9"ipment val"es an$ economic activity in areas ,here the ro"p or "siness "nit has concentrate$ its loan port-olio can pose signi0cant ris(s. Collateral provi$e$ -or a loan $eclines in val"e or is lost eca"se "na"thori?e$ $ivestit"re or "se. Collateral hel$ y a thir$ party $eclines in val"e or is lost eca"se the party goes o"t o- "siness. Collateral provi$e$ y a co"nterparty on the net amo"nt y ,hich a s,ap ,ith another party is o"t o- the money. Change in the legal stat"s o- orro,ers 8e.g. an(r"ptcy.)
•
I+RMA%I+ R $ECISI+-MAKI+, RISK In#ormation #or $e!ision Making Risk- In#ormation #or e!ision making risk is t
$e5nition
RCESS* ERA%I+AL $ECISI+ MAKI+, RISK
&erationa0 in#ormation #or e!ision making risk is t
Lac( o- relevant an$/or reliale in-ormation s"pporting pricing $ecisions may res"lt in prices or rates that c"stomers are "n,illing to pay $o not cover $evelopment an$ other cost or $o not cover ris( epos"res ass"me$ y the gro"p or "siness "nit. There are many -orms o- pricing ris(; •
•
•
The ro"ps or "siness "nits price is more than that the c"stomers ,illing to pay eca"se the ro"ps or "siness "nits pricing strategies not ase$ on mar(et research or other systematically otaine$ c"stomer $riven in-ormation. Pro$"cts are price$ in relation to mar(et -orces "t are not pro0tale $"e to competitive -"n$ing $i=erences. The ro"ps or "siness "nits pricing -or certain pro$"cts $oes not cover their pro$"ction an$ $istri"tion costs eca"se o- ina$e9"ate pro$"ct an$ $istri"tion cost in-ormation.
The ro"p or "siness "nit ta(es on -oreign c"stomers maintains price lists or signs long6term contracts an$ is epose$ to c"rrency ris(s eca"se sales managers $o not "n$erstan$ s"ch ris(s ,hen ma(ing pricing $ecisions. Contra!t Commitment Risk
Lac( o- relevant an$/or reliale in-ormation concerning contract"al commitments o"tstan$ing as o- a point in time may res"lt in s"se9"ent incremental contract"al commitment $ecisions that are not in the est interest o- the ro"p. The ro"p or "siness "nit $oes not have relevant an$/or reliale in-ormation that e=ectively trac(s contract"al commitments o"tstan$ing at a point in time so that the 0nancial implications o- $ecisions to enter into incremental commitments can e appropriately consi$ere$ y $ecision
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%y&e o# Risks
$e5nition ma(ers. Commitments eme$$e$ in contract"al agreements incl"$e c"rrency ris( sharing arrangements. S,aps options -"t"res an$ other $erivatives also create contract"al commitment ris(. I- the ris(s associate$ ,ith these commitments are not "n$erstoo$ an$ manage$ on an aggregate asis $ecision ma(ers ,ill e ma(ing operating $ecisions in isolation that may not e in the est interest o- the ro"p as a ,hole 8i.e. they may accept ris(s they sho"l$ reect or reect ris(s they sho"l$ accept). er#orman!e Meas.rement Risk
Process per-ormance meas"res $o not provi$e a reliale portrayal o- "siness per-ormance an$ $o not acc"rately re:ect reality 8i.e. they are not reliale in-ormation ao"t reality eca"se they $o not Atell the storyA as to ,hat is really happening ,ithin the processes o- the "siness). The meas"res $o not provi$e relevant in-ormation -or $ecision ma(ing eca"se they are not; In-ormative 8e.g. they $o not tell $ecision ma(ers ,hat is really happening an$ ho, processes are per-orming).
• • •
•
A0ignment Risk The oectives an$ per-ormance meas"res o- the ro"ps "siness processes are not aligne$ ,ith its overall "siness oectives an$ strategies. The oectives an$ meas"res $o not -oc"s people on the right things an$ lea$ to con:icting "ncoor$inate$ activities. I+A+CIAL A+$ BSI+ESS $ECISI+ MAKI+, RISK
B.siness re&orting in#ormation #or e!ision making risk is t
on eistent "nrealistic irrelevant or "nreliale "$get an$ planning in-ormation 'ay ca"se inappropriate 0nancial an$ "siness concl"sions an$ $ecisions. 7"$gets an$ "siness plans are not; !ealistic. 7ase$ on appropriate ass"mptions. 7ase$ on cost $rivers an$ per-ormance meas"res. ccepte$ y (ey managers.
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%y&e o# Risks
$e5nition A!!o.nting In#ormation Risk
*ver6emphasis on 0nancial acco"nting an$/or act"arial i n-ormation to manage the "siness may res"lt in the manip"lation o- o"tcomes to achieve 0nancial targets at the epense o- not meeting c"stomer satis-action 9"ality an$ e>ciency oectives. &inancial acco"nting in-ormation is "se$ to manage "siness processes an$ is not properly integrate$ ,ith non60nancial in-ormation -oc"se$ on c"stomer satis-action meas"ring 9"ality c"stomer/pro$"ct pro0taility an$ increasing e>ciency. The res"lt is a myopic short6term 0ation on manip"lating the o"tp"ts o- "siness processes to achieve 0nancial targets rather than -"l0lling c"stomer epectations y controlling an$ improving processes an$ pro$"cts.
inan!ia0 Re&orting Eva0.ation Risk
%a3ation Risk
&ail"re to acc"m"late relevant an$ reliale eternal an$ internal in-ormation to assess ,hether a$"stment to $isclos"re in 0nancial statements are re9"ire$ may res"lt in the iss"ance o- mislea$ing 0nancial reports to eternal sta(ehol$ers. &inancial reports iss"e$ to eisting an$ prospective investors an$ len$ers incl"$e material misstatements or omit material -acts ma(ing them mislea$ing. &inancial reporting eval"ation ris( "s"ally res"lts -rom -ail"re to otain relevant "siness in-ormation -rom eternal an$ internal so"rces an$ assess ,hether a$"stments to or $isclos"res in the 0nancial statements are re9"ire$ to -airly present 0nancial position res"lts o- operations an$ so"rces an$ "ses o- cash. &ail"re to acc"m"late an$ consi$er relevant ta in-ormation may res"lt in non6compliance ,ith ta reg"lations or a$verse ta conse9"ences that co"l$ have een avoi$e$ ha$ transactions een str"ct"re$ $i=erently. Taation ris( has t,o (ey elements; • •
Compliance ,ith all ta reg"lations payment an$ 0ling re9"irement. Signi0cant transactions o- the entities in the ro"p have a$verse ta conse9"ences that co"l$ have een avoi$e$ ha$ they een str"ct"re$ $i=erently.
Taation ris( has the element o- Compliance !is( "n$er Process6*perations !is(. Eo,ever $"e to the pec"liar nat"re o- taation6relate$ ris(s they are classi0e$ "n$er Taation !is( that can incl"$e; •
•
Com&ensation an Bene5t
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!is( in relation to the $e0ciency or ins">cient ,ithin the ro"ps internal processes in collating relevant in-ormation -or taation p"rposes. &ail"re to consi$er/"se the in-ormation -or ta compliance an$ ta ene0t maim"m p"rposes
llocation o- assets to -"n$ compensation an$ ene0t oligations 8i.e. pension plans $e-erre$ compensation plans retiree me$ical plans) are ins">cient to satis-y the oligations. The
%y&e o# Risks
$e5nition Risk
conse9"ences o- compensation an$ ene0ts ris( incl"$e rep"tation ris( loss o- morale ,or( stoppages litigation an$ a$$itional -"n$ing re9"ire$ o- the gro"p.
Investment Eva0.ation Risk
Lac( o- relevant an$/or reliale in-ormation s"pporting investment $ecisions an$ lin(ing the 0nancial ris(s accepte$ to the capital at ris( may res"lt in poor short or long6term investments. 'anagement $oes not have s">cient 0nancial in-ormation to ma(e in-orme$ short an$ long6term investment $ecisions an$ lin( the ris(s accepte$ to the capital at !is( an$ the li9"i$ity nee$ o- the gro"p or "siness "nit.
Reg.0atory Re&orting Risk
Incomplete inacc"rate an$/or "ntimely reporting o- re9"ire$ 0nancial in-ormation to reg"latory agencies may epose the ro"p to 0nes penalties an$ sanctions.
Environment*strategi! in#ormation #or e!ision making risk are t
&ail"re to monitor the eternal environment or -orm"lation o- "nrealistic or erroneo"s ass"mptions ao"t environment ris(s may ca"se the ro"p to retain "siness strategies long a-ter they have ecome osolete. +nvironmental scan ri s( arises ,hen; The ro"p $oes not have an e=ective process to otain relevant in-ormation ao"t the eternal environment. Key ass"mptions ao"t the eternal environment are inconsistent ,ith reality or are not eing monitore$ y the ro"p. •
•
&ail"re to monitor an$ stay in to"ch ,ith a rapi$ly changing environment ,ill res"lt in osolete "siness strategies. B.siness ort#o0io Risk
Lac( o- relevant an$ reliale in-ormation that enales management to e=ectively prioriti?e its pro$"cts or alance its "sinesses in a strategic contet may precl"$e a $iversi0e$ organi?ation -rom maimi?ing its overall per-ormance &or the $iversi0e$ ro"p having m"ltiple pro$"cts an$/or "siness "nits there is an a$$e$ $imension to strategic in-ormation -or $ecision ma(ing ris(. 7"siness port-olio ris( is the .ris( that the ro"p ,ill not maimi?e "siness per-ormance y e=ectively prioriti?ing its pro$"cts or alancing its "sinesses in a strategic contet. This ris( applies to eval"ating oth o,ne$ "sinesses 8e.g. to $eci$e ,hether to invest/gro, maintain/harvest or $ivest/li9"i$ate) an$ prospective "sinesses 8e.g. ac9"ire Moint vent"re or strategically align). C"rrent tren$s in meeting c"stomer resi$ential len$ing nee$s are a goo$
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%y&e o# Risks
$e5nition eample.
8a0.ation Risk
Lac( o- relevant an$ reliale val"ation in-ormation may precl"$e o,ners or prospective o,ners -rom ma(ing in-orme$ assessments o- the val"e o- the ro"p or any o- its signi0cant segments in a strategic contet. 'anagement an$ (ey $ecision ma(ers are "nale to relialy meas"re the val"e o- speci0c "siness or any o- its signi0cant segments in a strategic contet. This ris( a=ects the eval"ation o- oth o,ne$ "sinesses 8e.g. to $eci$e ,hether to invest/gro, maintain/harvest or $ivest/li9"i$ate) an$ prospective "sinesses 8e.g. ac9"ire oint vent"re or strategically align).
er#orman!e Meas.rement Risk
on6eistent irrelevant or "nreliale per-ormance meas"res that are inconsistent ,ith estalishe$ "siness strategies threaten the ro"ps aility to achieve its long6term strategies.
rgani9ation Str.!t.re Risk
'anagement lac(s the in-ormation nee$e$ to assess the e=ectiveness o- the ro"ps or "siness "nits organi?ational str"ct"re ,hich threatens its capacity to Change or achieve its long6term strategies. The ro"ps or "siness "nits organi?ational str"ct"re $oes not s"pport change the ro"ps or "siness "nits primary "siness strategies. The ro"ps val"es an$ c"lt"re its in-rastr"ct"re an$ ho, it $e0nes responsiility a"thorities an$ o"n$aries an$ limits have a signi0cant e=ect on its aility to govern an$ achieve its oectives. These ris(s are strategic eca"se they a=ect the ro"pNs • • • • • •
Reso.r!e A00o!ation Risk 0anning Risk
The ro"ps reso"rce allocation process $oes not estalish an$ s"stain competitive a$vantage or maimi?e ret"rns -or sharehol$ers. n "nimaginative an$ c"mersome strategic planning process may res"lt in irrelevant in-ormation that threatens the ro"ps capacity to -orm"late viale "siness strategies. The ro"ps "siness strategies are not; Briven y creative an$ int"itive inp"t e.g. it is primarily a res"lt o- a -ormal time •
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llocation $eployment an$ $evelopment o- reso"rces. Ta e>ciency 7"siness process reengineering an$ "siness process/technology improvement e=orts. I$enti0cation so"rcing meas"rement an$ control o- "siness ris(s. 'eas"rement an$ monitoring o- per-ormance Kno,le$ge o- c"stomer nee$s an$ epectations.
