Enterprise Risk Management Discussion

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thcere

Engineering

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Explanation & Answer

Attached.

Running Head: RISK MANAGEMENT

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Enterprise Risk Management in the Banking Sector

Student’s Name
Professor’s Name
Institution Affiliation
Date

RISK MANAGEMENT

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Enterprise Risk Management in the Banking Sector
Introduction
Enterprise risk management (ERM) can be defined as an integrated and systematic process
through which a company manages the risks it faces. ERM advocates that firms consider all their
risks in entirety as opposed to treating them individually. It is the process which firms in various
industries evaluate, control and monitor different sources of risks with the aim of improving the
value offered to stakeholders. Both short and long term. This idea came about in the late 1990s.
In this, both competitive and operational risks are measured. They are then managed through a
single continuous framework as opposed to the traditional silo approach. However, it does
incorporate some risk management activities, for example, risk identification, risk governance,
and hedging. Its structure helps the management maximize the value of its assets. It is a
synchronized attempt at using the right-hand side of the statement of financial position to boost
the left-hand side. This way, value is created. This is known as the return on assets (Bogodistov
& Wohlgemuth, 2017). There has been an increase in the adoption of ERM in various entities
across the economy. Notably, is in the banking sector where it has been appreciated. Further,
there has been a rise in articles about ERM in the business press. Nevertheless, research about
ERM and its importance is still in its infancy stage. Furthermore, such research tends more
toward the accounting and finance fields. The tools and solutions offered in these fields only
apply to risks that can are quantitative in nature, that is, they possess statistical qualities.
Therefore, ERM in management is somewhat neglected and this creates a knowledge gap
especially in the management field. More research is necessary to understand this phenomenon
better (Bromiley et al., 2014). This paper will look at the adoption of ERM in the banking sector,

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RISK MANAGEMENT

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challenges faced solutions and the benefits. Additionally, it will also consider the effect of the
financial crisis and how it impacted the sector.
Background
ERM Conceptual Framework
In order to understand ERM better a historical review of academic literature will come in
handy. In the past, the methods used to manage risks were unique for each type of risk. This
subdivision was because of the varying functions in the company. For example, the finance
department would handle risks to do with variations in interest rates and currency. Insurance
would handle the liabilities and natural catastrophes while the operations department was in
charge of safety and quality risks in an organization. There were specific tools for each risk. The
Committee of Sponsoring Organization of the Treadway Commission (COSO) is the top expert
in the ERM field (Anders, 2019). It advocates that through ERM, risks are better understood
based on their impact. Today, ERM can be implemented by all size enterprises. Both big and
small in minimizing risk (Meinert, 2018). Information from managing enterprise risks comes in
handy in assisting corporate executives to formulate accurate decisions in terms of capital
utilization, performance evaluation, and training employees.
ERM and Default Risk in Banks
Default risk is twofold in nature. It can be on the part of the bank being unable to honor its
current or future obligations to the creditors and the outside parties defaulting on loan repayments
advanced by the bank. Default risk is measu...


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