Risk Management Technology in Financial Services

Elsevier UK Jobcode:RTF Chapter:CH02-H8304 22-3-2007 5:09p.m. Page:27 Trimsize:165×234MM

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What is meant by risk management? 27

Over and above these risk factors, a company’s mining operations and exploration

activities are subject to extensive federal and state regulations. Management may

believe that it is in substantial compliance with all current laws. However, since laws

and regulations are subject to constant change, there can be no guarantee that future

changes will not have a material adverse effect on the firm by:

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Reducing levels of production, or

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Delaying or preventing the development of new mining properties.

Furthermore, if the mining company plans mergers and acquisitions in its industry,

then it is subject to business uncertainties and contractual restrictions as a result of

the anticipated merger. Uncertainty about the aftermath of the merger on employees

and customers may also have an adverse effect on the firm, even if management

intends to take steps to reduce such fallout.

For instance, the consolidation and downsizing of personnel usually following a

merger, might impact on the firm’s ability to attract, retain and motivate new qualified

personnel. Or it could cause customers, suppliers and others that deal with the firm

to seek to change existing business relationships. Seen from a senior management

viewpoint, these are business risk factors. (More on risk factors in section 2.2 and

Chapter 3.)

2.2 Risk management

Well-governed institutions look at risk as an opportunity to exercise authority by

being in charge of exposure; and at risk control as an ongoing process starting with

definition of business objectives, followed by policies on exposures which could,

should or should not be assumed; identification and assessment of risk factors, as

well as elaboration of ways and means for the management of risks associated with

financial activities.

Next to appropriate policies, and the authority to see them through, effective

risk management requires a first class infrastructure. This includes real-time data on

exposure; marking to market inventoried positions; statistics permitting extrapolation

of trends; and analytical accounting information. Moreover, quantitative information

alone while necessary is not enough. Risk is also perceived qualitatively by the risk

manager’s mind’s eye. In a nutshell, a strategy targeting business success starts with:

1. A strong commitment by the board to an independent risk management structure.

This means the firm’s risk management group should be organizationally inde-

pendent of risk-generating functions, such as trading or investment activities. To

assure independence of opinion and action, risk management must be reporting to

the executive committee, and should be audited by internal auditing. This risk man-

agement function is, in fact, the alter ego of internal control, charged with day-to-day

responsibility for:

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Risk monitoring,

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Measurement,