Kaplan and Mikes use the Deepwater Horizon oil rig explosion as a prime example of the shortcomings of traditional risk management. An over-reliance on rules based risk management can lead to a culture of comfort and over-confidence when it comes to risk. This rules based approach is also just not sufficient or appropriate for measuring and preparing for all types of risk. A different approach, encouraging debate and challenge is required.
Explain the risk management framework outlined in Kaplan and Mikes
The starting point for Kaplan and Mikes risk management framework is to categorise the types of risks that organisations can face, with each category having its own required approach for management.
Category 1 – preventable…show more content… This type of strategy can most often be seen in firms that push the envelope of innovation and therefore face high levels of embedded risk within projects.
• Facilitators – In firms that operate in more stable environments, risk may come about from operational decisions across a the firm that may seem unrelated. By utilising a small risk management group that surveys the whole firm and collects info from across the entire operation, operational management can be made more aware of the implications of their decisions across the full spectrum of the company’s risk profile.
• Embedded experts – Particularly useful in the field of financial services, experts are embedded within the organisation working closely with line management in order to continuously monitor and have an influence on the company’s risk decisions. By working so closely with line management, these risk managers have the ability to question decisions and force line managers to think about potential risks on a daily basis. These experts should be deal questioners, not deal makers. The danger is that they can “go native” becoming too involved with the leadership of their respective…show more content… Keeping a strict delineation between these experts and line management is vital in terms of maintaining a functional strategy risk management policy. As mentioned above, we do not want our deal questioners “going native” and becoming deal makers themselves!
As for managing the external market risks posed to Bank of Ireland, tail risk stress testing should be utilised to assess major changes in a number of variables (such as property prices, large change in interest rates, Brexit etc) and how they would affect the Bank’s position. One of the issues with risk management leading up to the financial crisis was the assumptions used in the stress testing by banks. They “assumed a worst case scenario in which US house prices levelled off and remained flat for several periods” and did not plan at all for a drop in house prices.
War gaming could be utilised to devise strategies to cope with new and disruptive technologies and new competitors from other fields. This latter risk is one that will become more prevalent over the coming years as the likes of Apple, Google, Facebook and Amazon move into the financial payments world (Marous, 2014).