The Enterprise-Wide Risk Management

Risk management is the core of bank management, in a sense, thebank's risk management level determines its competitiveness. Thestudy shows that in recent 30 years, all of those banks who occurredcrisis management even went bankrupt , without exception that wereserious problems in risk management . The reasons led to the crisis inthe banking from the earlier single risk factor to many risks'joint-influence in now days. This is a new challenge to the theory andpractice of risk management in bank, it was recognized that the failureof commercial banks are no longer induced only by single risk, but byjoint cause such as the market risk, credit risk and operational riskfactors. The enterprise-wide risk management (ERM) was budded inthis context, it pointed out a new direction of banking risk management--risk management elements from single risk management tocomprehensive risk management.The ERM refers to the entire banking operations of various levels,the overall management of all types of risk, such management requirethe portfolio of credit risk, market risk, operational risk and other risksincluding those risks with financial assets, assume those risks variousbusiness units into a unified system, on the basis of uniform criteria formeasuring risk and plus total, and on the basis of relevance for alloperational control and risk management. September 2004, COSO firstintroduced the" Enterprise Risk Management——IntegratedFramework.", the report will be develop ERM from concept to practiceoperational level.The ERM embodied in its centralized database and integrated riskanalysis approach, the core approach of ERM is Risk—adjusted returnon capital(RAROC), which is one of the core management ofcommercial banks management technology, it is issued at the end of the70s of the 20th Century by Bankers Trust Company, and in the secondhalf of the 20th century through the 1990s has been continuouslyimproved and being widely used by advanced international banks, nowhas become the core risk management of ERM methods. The core ideaof RAROC is :Quantified the future predictable losses brought by risk forthe current cost , together with the financial institutions operating costs ,direct adjustments to the current profit, measuring the size ofrisk-adjusted returns, and to consider the possible greatest risk formake capital ready ,and to measure the actual use of capital efficiency,proceeds to the banks directly linked with the risks banksundertaken ,with the eventually goal of integrating the banks profits forthe banking business , providing important and uniform standards for alllevels of decision-making, performance evaluation, goal setting, andother aspects of business managements .based on unified standards.RAROC methodology changed in the past banks mainly interest yield orreturn to shareholders inspection operating performance andmanagement models, more in-depth and more clearly study of riskenormous impact on commercial banks.At present, there are many obstacles in the way of China'sstate-owned commercial banks to implement ERM framework (system):First, the bad external environment, the specific performance are :credit system has not established, no required data for asses risk;Thelimited role of market external supervision and discipline, bankinginformation disclosure is not standardized;Inadequate developmentfinancial markets, especially lacking of derivatives markets greatly limitsthe bank' choice of risk management instruments;Second, there has a lot of deficiencies in internal management, thespecific performance : in general, the standard level of riskmanagement in our state-owned banks is at the lower of the riskmanagement stage --risk control phase;Lack of proper andcomprehensive risk management culture philosophy, the absence of anindependent integrity of the risk management system, and the modernsense of independent risk management has not really established;riskmanagement tools and technological are not advanced, and so on;Based on the above analysis, this paper presented a idea aboutfounding ERM framework at China's state-owned commercial banks :First, it is necessary to consummate corporate governancestructure, which is the premise of implementing a ERM framework in abank, a sound and effective corporate governance will institutionallyguarantees ERM objectives;The following is the establishment of an independent ERMframework, which is the core part of a ERM framework system, thispaper detailed exposition thin part: risk management objectives, themost important thing is that the board of a bank determine their riskpreferences on the basis of analyzing their own capital to the situation ofinternal constraints, this paper views that China's state-ownedcommercial banks should take a conservative risk approach;riskmanagement in the organization, to establish the West Bank's riskmanagement matrix organizational framework, establishing operationalrisk managers and risk managers function separately;In infrastructurebuilding, establishing an independent risk management center,establishment formal policies and procedures, consistent riskmeasurement methods, extensive management reports communicationand information technology complete;In addition, this paper also raised other conditions for theimplementation of the ERM framework: sound laws and regulations,consummating the legal protection for bank's ERM framework;Improving risk assessment technology to enable access to a variety ofrisks unified measurement;Establishing centralized database, to meetthe need of quantitative prerequisite in risk management;Speeding upthe training of qualified personnel for risk management , creatingpersonnel who truly familiar with the modern commercial banks ERMmodels and can use today's advanced skill in risk managementpractices.In conclusion, After analyzing the latest trends of risk managementin international advanced banking and the various deficiencies of riskmanagement in our state-owned commercial banks , and taking intoaccount the competition brought by china' upcoming opening bankingindustry to foreign banks, this paper points out that, the implementationof ERM system is the direction and the inevitable demand for China'sstate-owned commercial banks to raise their risk management level andenhance their core competitiveness.