Financial Education

Enterprise Risk Management is a term used to describe a centralized risk governance process that takes place at the level of senior management. It takes a firm-wide perspective, considering individual risk factors both in isolation and in terms of their interplay with other risk exposures.

An effective risk management system seeks to control exposure to:

• stock market fluctuations, interest rates, exchange rates and commodity prices
• credit and default risk, asset/liability management, operational systems, fraud and other factors

The steps to effective Enterprise Risk Management are to:

1. Identify each risk factor to which the company is exposed
2. Quantify the size of each exposure in money terms
3. Map the inputs into a risk estimation calculation
4. Identify the overall risk exposures and the contribution to overall risk derived from each factor
5. Set up a process for periodic reports to management, who will determine capital allocations, risk limits and risk management policies
6. Monitor compliance with the policies and risk limits

For more information, see all articles on: Governance, Portfolio Management, Risk Management

See also:

Value at Risk (VaR)

Risk Governance

Investment Risk Management Process

Liabilities

Types of Risk in Equity Portfolio Management