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ENTERPRISE RISK MANAGEMENT: AN OVERVIEW Enterprise Risk Management is a method for identifying, assessing, controlling, and reporting risk throughout the enterprise The board and management have responsibilities for governing the bank’s structure, operations, and risks, especially by establishing a risk culture and risk appetite Enterprise risk management typically engages three separate, independent functions (commonly referred to as the three lines of defense: front line business units (sometimes called risk control), independent risk management, and internal audit ERM Requirements for Financial Institutions $50 Billion and Larger are not discussed in this presentation – those requirements are reflected in the source materials on the last slide of this presentation WHAT IS ENTERPRISE RISK MANAGEMENT (ERM)? ERM is a process by which a regulated financial institution: Establishes a risk culture for the enterprise and a risk appetite for the businesses and processes in which it engages; Identifies the risks associated with those businesses and processes Controls the risk associated with those businesses and processes Monitors its businesses and processes to determine if the controls are effective at preventing and detecting the risks associated with the businesses and processes Reports to the board and management on key indicators of those risks and the effect on the financial performance, safety, and reputation of the financial institution ERM AND THE FEDERAL RESERVE’S SR 16-11 The Federal Reserve places significant supervisory emphasis on an institution’s management of risk, including its system of internal controls, when evaluating the overall effectiveness of an institution’s risk management An institution’s failure to establish a management structure that adequately identifies, measures, monitors, and controls the risks of its activities has long been considered unsafe-and-unsound conduct Principles of sound management should apply to all risks facing an institution including credit, market, liquidity, operational, compliance, and legal risk SR 16-11 Supervisory Guidance for Assessing Risk Management at Supervised Institutions with Total Consolidated Assets Less than $50 Billion ERM IS IMPORTANT FOR SUPERVISORY RATINGS Besides limiting credit and operating losses, effective ERM affects the CAMELS rating The “M” in CAMELS represents an assessment of the quality of board oversight and management supervision The “management” rating reflects examiner conclusions about the board and management’s willingness and ability to effectively address governance, risk management, compliance, bank operations, and financial performance. THE BOARD AND MANAGEMENT ARE RESPONSIBLE FOR EFFECTIVE ERM The board and senior management are expected to use good corporate governance and risk governance practices to: Set the bank’s strategy, objectives, and risk appetite Establish the bank’s risk governance framework Identify, measure, monitor, and control risks Supervise and manage the bank’s business Protect the interests of depositors, protect shareholders’ or members’ (in the case of a mutual FSA) obligations, and take into account the interests of other stakeholders Align corporate culture, activities, and behaviors with the expectation that the bank will operate in a safe and sound manner, operate with integrity, and comply with applicable laws and regulations
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