Identifying and Managing Risk

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The world is advancing financially leading to an increased risk of occurrence of economic crisis. In the past, financial risk had caused devastating economic situations after becoming a reality. However, using past experiences, humankind has put in place policies to reduce the possibilities of those risks reoccurring. Nonetheless, investors have become thoughtful of future economic meltdown. As a result, companies are devising systems that can examine occurring risks-whether new or old. They are establishing risk committees and others are using automated systems to control their risk.

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For companies employing a risk committee, the committee members exercise company duties while on the watch for any risk. On detecting the risk, they send the message to senior risk managers of the company who informs other risk-managing employees. Then, the executive risk board supervises the risk again before notifying the risk executives to manage the risk (Bugalla, Kallman, Mandel, & Narvaez, 2012). However, this risk monitoring method is old-fashioned and hierarchic. It reduces the speed of making a decision and denies all risk managers a chance of controlling risks. However, controlling risk requires unity and a workforce. Hence, all risk managers should be allowed to partake in assessing the companys routine and making production decisions to manage risk successfully and timely especially for complex firms.

. On the other hand, companies may opt to install an automated system called Network Approach to Risk Management (NARM) to manage their risk. The system flowchart visualizes banks as the interconnection of financial relationships. It integrates financial and networking principles to obtain a business algorithm that analyses attributes of the systematic risks for each bank through simulating every days collected data (Hu, Zhao, Hua, & Wong, 2012). This system makes fast, reliable, and accurate calculations. It also works independently. Hence, its prediction of risk is instant and more accurate. However, it is liable to manipulation through changing its application codes.

Other companies like banks may opt to incorporate the two systems for better monitoring of the risks leading to a hybrid risk monitoring system, which is reliable and more accurate since every system works differently and has shown proven risk management potentials. By incorporating the two systems, the systems will check each other’s risk profile when the other is down. Moreover, the system will delegate duties according to their expertise. For instance, NARM would identify risks related to calculations and the risk committee would monitor the risks in other fields. Moreover, the incorporation of NARM would reduce the cost of monitoring risk by reducing the number of risk-controlling employees. Hence, the scope of the hybrid system would increase.

However, installing these systems is requiring some sacrifice. For instance, the implementation of systems to manage risk is reshaping the board of directors of the company. The slipping in of elements of risk in the executive of the company requires reestablishment of roles of the executive to accommodate roles of risk executive. For instance, there is a change in risk control from the audit team to the risk executive, which delegates duties. In the past, audit incorporated risk management but they were not specialists in managing risks. However, the current system is ensuring the audit team concentrates on advising the management over its financial statement leaving room for risk executives to collects the necessary information and analyze risks professionally. However, the NARM system does not change the corporate executive formation. Its technology moderates risks in single or interrelated banks from economic distress that may affect other banks through enabling experts in the field to make accurate and efficient decisions (Hu, Zhao, Hua, & Wong, 2012). As a result, through effective use of its technology, the future is more secure than the employment of the risk committee alone.

Furthermore, effective risk monitoring requires regular and accurate communication. The risk committee coordinates its operations with the audit sector through the audit chair. Each department ensures the other receives timely and full information to assist in overseeing risk (Bugalla, Kallman, Mandel, & Narvaez, 2012). The NARM system provides useful information to central banks over data collected regarding systematic risk from every bank to help them inject capital into the economy. Moreover, the system algorithms manage important information over risks associated with using bank and capital adequacy ratio (Hu, Zhao, Hua, & Wong, 2012). Consequently, the risk committee process is more inclined to make mistakes than the NARM system since the risk committee is a single department heavily relying on another for information but information distortion occurs when passing it between parties. However, the NARM system works independently and only communicate when absorbing raw data or giving out result.

Moreover, risk monitoring systems set up the companys risk tolerance and appetite. At committee risk management system, determination of companys risk tolerance and appetite sets risks strategic issue to managers and in business operations, it delivers an operational constraint (Bugalla, Kallman, Mandel, & Narvaez, 2012). On the other hand, the NARM system establishes the companys risk tolerance by computer interpretation of portfolio theory. Hence, it enables the correlation of relationships between several banks. The computer system generates a simulation of the systematic risks from real-world banking information. The simulated information facilitates central banks to analyze the bank status before injecting capital into the economy (Hu, Zhao, Hua, & Wong, 2012). Nevertheless, the NARM system is a powerful tool in setting the companys tolerance than committee risk. It interconnects all banking systems and controls their overall risk whereas the risk committee is independent in a single companys branch.

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Besides, the risks management system offers intelligence on how to manage future threats and fasten opportunities. They offer management information about risks that are emerging with their in-depth of their analysis. This assists to secure the future investment of the company. Both risk committee and NARM systems determiners risks affecting the companys performance. However, the risk committee employs human labor and it is, therefore, more flexible in risk management than NARM, which is a machine that reports as per given instructions.

Lastly, risk-managing systems monitor enterprises for risk. Risk executives have picked representation from various sectors of enterprises, others from the core part of executive managers and outside risk stakeholders like regulators or rating agencies to handle external risk efficiently. For NARM, its representations include computers at end-points of the system. Its working does not rely on any information from a specific department but it relies on all banking operations to compile its own data through data mining.

In conclusion, the two systems of managing risk can be useful to companies especially when employed together. They operate independently in most of their operations and test different types of risks. Incorporating risk monitoring in the company’s management helps to reduce the chance of an economic crisis occurring. Moreover, when this risk management is automated, precise monitoring occurs.

References

Bugalla, J., Kallman, J., Mandel, C., & Narvaez, K. (2012). Best Practice Risk Committee. Web.

Hu, D., Zhao, L. J., Hua, Z., & Wong, M. C. S. (2012). Network Based Modeling and Analysis of Systematic in Banking System. MIS Quarterly, 36(4): 1269-1291.

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