The growth of the economic and banking field over the last 50 years has been unstoppable. It had ups and downs with local risk exposures to global ones. The latter is the actual environment worldwide. Nevertheless, Risk Management has evolved with the different model changes. The area went from individual, transaction-based decisions to looking at portfolios of risk, created by analytical tools. The tools and techniques of these professionals improved over the years. Yet, it does not imply that the interaction model followed the same pattern. This relationship between risk and business keep the same ‘us vs them’ dynamic. But what’s the next step in Financial Risk Management? How did this discipline evolve over the decades? What kind of future awaits for it? Keep reading if you want to learn more!
What is Financial Risk Management?
Firstly, it is important to describe what is this area and what implies nowadays. So, the definition of this area could be the study of a possible risk in a business. Thus, this is important to identify and stop leakage in a business. Risk in the past was about saying ‘yes or no’ to business leaders, considering the risk’s perspective and the profile. This led to said leaders and revenue generators to have a distinct advantage.
Moreover, after the financial crisis, regulators forced to increase the importance of risk organisation. This is the reason why risk started to be considered something to be taken into account. Many groups converted into compliance officials with an agenda. Therefore, the objective of risk organisation nowadays is to have a place in meetings. It is important that this field does not become just a regulatory exercise and they consider its importance.
Companies and leaders must consider the importance of Financial Risk Management. This is essential in the functioning and the prevention of leakage and failure in a company’s business. They must, therefore, reframe the risk management area for it to evolve positively. Also, they must debate and mind the role of risk within an organisation. Therefore, this attitude will transform risk from control and compliance functions to valuable partners in business.
What’s the next step in this field?
The goal of this area is to move from the ‘us vs them’ strategy to an ‘us’. So, the organisation must change toward common objectives within the company. If this strategy is done properly, the company will move toward the pursuit of the objectives previously mention. Moreover, they could achieve an optimization of outcomes across different constraints.
First, starting from the senior levels within an organisation, there must be a buy-in. They must comprehend the importance of an independent view on the risk profile. This includes a broad view of the company and a narrower one of the risks in each product of the organisation. The leaders and directors of the organisation must understand the value of an effective risk function could make the value of a product exceed the cost.
Secondly, the organisation must achieve credibility by hiring professionals with talent to achieve the standards and technical competence. Moreover, they must ensure that they will respect different views and opinions and see them as an adding value.
Third, but probably the most important, transparency. It must be a key point in an organisation. The one involved in all aspects of decision-making. The process starts with the development of models and metrics used to form and manage the different risk profiles. Thus, the entire organisation must engage with this at the beginning of it. Regardless of the owner of the model, the development must be open and transparent.
The risk to achieve this, is the use of an effective risk appetite framework. It considers the balance of the risks and the resources within an organisation. It also analyses the perspective of the relevant internal and external stakeholders. The risk will be the storekeeper and the company must work, thus, as a corporate asset. This framework assures the company is inside the range of the desired risk while improving its outcomes.
You can observe Financial Risk Management is an evolving area and it plays an important role in business worldwide. If you want to become part of it, think about joining our Master in Financial Risk Management. Get the opportunity to grow even more in this field and become the expert and the professional that companies are looking for. What are you waiting for? Join us now!
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