Risk management

1. Organisations.

Risk management for organisations includes:

• Understanding what business and financial risks the organisation is exposed to, and then
• Considering whether the financial returns - or other benefits - generated are sufficient to justify taking those risks.

The risks need to be evaluated and assessed so that decisions can be made on whether to retain them, and if so whether to employ techniques to mitigate or transfer risks.

The underlying risks can be managed to limit risk. They can be hedged with counterbalancing exposures often created through the financial markets, or insurance taken out to protect the organisation's financial health.

Risk management for organisations includes the management of:

1. Business and operational risk
2. Commodity risk
3. Credit risk
4. Exotic risk
5. FX risk
6. Interest rate risk
7. Pensions risk

One way of working with risk management is through a framework comprising:

- Identification

- Assessment

- Evaluation

- Response and

- Reporting

Prepare for the worst - you'll be glad you did

"A lot of the benefits of risk management are not known until there has been an unforeseen event, sometimes years in the future.

So most of the time, it feels like a lot of hard dedicated work, updating , implementing, monitoring, and reporting various risk policies, which generally if all goes well are within tolerance and not much more is required.

But when something does happen, and they are needed, gosh, you really are glad that you put in the work, and did the right thing.

Much about risk management seems to be preparing for the worst, but hoping for the best."

Tim Coope FCT, Head of Treasury, Interim, St James’s Place.

Learn about financial markets as soon as possible

"What I would have wanted to know earlier in my career is the importance of understanding markets.

I would encourage students to start learning about financial markets as soon as possible.

The best way is to start investing even very small amounts, so that there is this experience of following the news, learning what drives the markets, how portfolios fluctuate etc."

Dimitris Papathanasiou CFA, Treasury and Risk Executive.

2. Wider economic risks.

Similar activity relating to the wider economy.

For example, the Bank of England's responsibilities in relation to the UK economy.

The economic impacts of Covid-19 to date: risk management

"At the start of this year, before the Covid-19 outbreak had any economic significance for the UK, I argued that risk management considerations called for a relatively prompt response to downside risks... the economy had some slack and seemed likely to remain sluggish, and risk management considerations implied that monetary policy should respond promptly to such downside risks.

This is because, with a low neutral rate and limited monetary policy space, the MPC’s ability to return inflation to the 2% target is asymmetric.

If the economy were to overheat and lift inflation above target, the MPC would have ample scope to tighten policy to push inflation back down to target.

But if the economy were to be stuck with sluggish growth and below target inflation, the MPC would have more limited scope for stimulus to lift inflation back to target.

In such conditions, risk management implies that policy should react in an asymmetric fashion – if tightening is needed, it should be gradual; if easing is needed, it should occur promptly.

And when the economy is soft, as it was early this year, it is better to err on the side of somewhat too much stimulus rather than too little.

I think these risk management arguments apply even more strongly now.

This is in part because the prospects for the economy are tilted more on the side of a slower recovery, in my view, stemming from high uncertainty, elevated risk premia and reduced risk appetite."

Michael Saunders, External Member of the Bank of England's Monetary Policy Committee (MPC), May 2020.

3. Treasury risk management - practitioner perspectives..

Protect the downside - and remember inactivity has consequences

"A treasurer will never be praised for taking risks, even if there is some upside.

Treasury is all about making sure the downside is protected.

That is the value that good risk management brings in the treasury profession.

On that note, it is important to remember that - when it comes to hedging - not doing anything is a decision in its own right.

Of course, at times, not using hedging instruments (derivatives) might be the best scenario for the business - especially if there are natural hedges to exploit internally.

But be conscious in your approach to risk management, and remember that inactivity - or the lack of decision-making around hedging - is in fact an action with consequences."

Eleanor Hill, Founder, The Treasury Storyteller.

People risks and opportunities

"We’re in a turbulent time globally, including elections, wars, challenging interest rates and increased market volatility.

Some of today’s treasury and finance leaders have been through periods where interest rates were similar to those in the 07/08 global finance crisis, but a lot haven’t!

This highlights the ever greater need to have the best treasury people in place, who can step back and deal strategically and with a rapidly evolving domestic and international political and economic environment."

Fi Wallace, Associate Director, Treasury & finance recruitment, Renoir.

Fundamental in crisis

"Risk management has always been a key part of the treasurer’s job description, but at times of crisis it becomes fundamental."

Joanna Bonnett FCT, Group Treasurer, Straumann Group.

See also

• Asset-liability management
• Bank of England
• Black swan
• Canary in the coal mine
• CFA
• Corporate treasury
• Downside risk
• Easing
• Enterprise risk management
• Experience
• Financial markets
• Financial model
• Foreign exchange risk
• Forward contract
• Global Financial Crisis
• Guide to risk management
• Hedging
• Inflation target
• Insurance
• Interest rate risk
• Key risk indicator (KRI)
• Materiality
• Metric
• Monetary Policy Committee
• Monetary policy space
• Natural hedge
• Neutral rate
• Non-transferable risk
• Portfolio
• Reputational risk
• Resilience
• Risk
• Risk analysis
• Risk appetite
• Risk assessment
• Risk averse
• Risk evaluation
• Risk identification
• Risk Management Association
• Risk management framework
• Risk management policy
• Risk premium
• Risk register
• Risk reporting
• Risk response
• Risk tolerance
• Soft
• Sustainability
• Systemic risk
• Tail risk
• Tightening
• Transferable risk
• Treasury
• Treasury Risk Management Committee
• Volatility

Other resources

• Risk management - Technical resources

• Treasurers need to take a structured approach to managing risk