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Ready for ERM: If Risk Management Is New Religion, Enterprise Risk Management Is Its Mantra

What if you could run a bank where every risk was mitigated and every loss was compensated? What if every employee shared your values and pursued your very same goals? What if your compliance was so good that the regulators simply signed off? To good to be true? No doubt. But such are the goals of enterprise risk management, or ERM. And, more than just a trendy concept, it is rapidly becoming a necessary part of growing a business. A Deloitte & Touche survey shows that at least 81% of global financial services institutions have established the position of "chief risk officer," an increase from 65% in 2002. The survey shows that 75% of these CROs report directly to the top. CEOs are realizing that they need a more hands-on approach to managing a growing plethora of risks enveloping the banking game, and what makes ERM so compelling is that it expresses risk not just as a threat, but also as an opportunity. Avoiding the penalties that come with risk means you can take on more risk which can lead to more profit-taking. Banks have always been in the business of risk management, as opposed to risk avoidance, but it's a long way from traditional risk management to ERM. What has changed is treating the vast variety of risks in a holistic manner, and elevating risk management to a senior management responsibility. It took a slew of serendipitous developments in the last decade to set the stage for this new way of managing risk. There was the Y2K phenomenon. Then came the 9/11 tragedy with the thousands of risks to businesses that it exposed. Meanwhile, massive thefts of personal data have put the reputations of several corporations at risk. The much discussed new risk capital rules known as Basel II have played a role, too. The accord dictates that banks must carry a specified amount of capital to offset predetermined risks, including not just credit and market risk but operational risk. Here at home, meanwhile, the Committee on Sponsoring Organizations (COSO), a private-sector group set up to combat fraudulent financial reporting and bring greater transparency to the way public companies operate, actually came up with a workable framework for enterprise risk management. (This document can be viewed on the committee's website, www.coso.org. Click on "publications.") Then there are compliance issues that evolved from the Sarbanes-Oxley Act and the USA Patriot Act. Add to this advances in technology, the accelerating pace of business, globalization, and the uncertainty of irrational terrorist activity. Meanwhile, the most devastating losses can result from risks that materialize out of nowhere with virtually no warning: think of hurricanes Katrina and Rita. All of these developments plus strong endorsements from the chief regulators have thrust ERM onto the front burners of many companies, banks included. Enterprise risk management at banks has evolved over time, according to Maurice H. Hartigan II, president and CEO of the Risk Management Association. "Companies other than banks were doing a better job of looking at the totality of their business risk. But, as some banks grew larger and took on other businesses, they began to realize that they had become so dispersed that relying on only one credit risk officer was inadequate." Hartigan describes ERM as the systematic management of all of the direct and indirect risks within a bank. "To know how much a bank is at risk, you don't just add up the risks, you have to synthesize the activities so that each risk is offset by another department's work," he explains. The concept is revolutionizing bank personnel structures. "Within the last few years, banks have been hiring chief enterprise risk officers," says Hartigan. "They report directly to the CEO and the senior audit committee member on the board." Risk as a competitive tool Importantly, ERM is not just a defense against loss. …