Risk Did you know? Financial services organizations help people buy houses, build businesses and protect their families financially. Banks, insurance companies, asset managers, pension administrators and other providers of financial services therefore have to manage various types of risks. For example, there is the potential that a borrower will fail to meet his or her obligations. What is Risk? At its core, the financial services industry is all about managing its exposure to uncertainty and as such, need to manage various types of risks including: 1. Credit Risk the potential that a borrower will fail to meet his or her obligations. Credit risk management attempts to quantify and manage the risk that is associated with borrowing and the failure of clients to meet the terms and obligations surrounding those transactions. 2. Market Risk is the risk of exposure to financial uncertainty/losses of trading or investment portfolios resulting from market fluctuations and volatility. Common types of market risk relate to asset prices, interest rates and currency exchange variation. 3. Operational Risk is the risk of loss from inadequate compliance with internal processes, systems and people, or from external events. These risks arise from the day-to-day operations. The types of risks being monitored are also evolving within the financial services industry. As an example, forms of risk that are being given more attention today include:! Liquidity Risk the risk of not being able to satisfy the demand for cash or funding obligations as they come due. This risk also includes the ability to sell or purchase assets in a timely manner.! Insurance Risk the risk that actual claims exceed expected claims.! Legal Risk the risk of undesirable outcomes due to non-compliance to laws, regulations, standards or other legal requirements.! Reputational Risk the risk of damage to an organization s reputation due to revenue loss, major regulatory violations, or evidence of criminal or fraudulent activities resulting in loss of confidence on the part of clients. Enterprise Risk refers to the overarching framework and approach that an organization uses to optimize the process with which risks are undertaken and managed. Risk management roles typically roll up under an organization s enterprise risk framework to which ultimate accountability usually rests with the Chief Risk Officer or the CEO in smaller organizations. People performing in risk management roles engage in activities to monitor, identify, measure and mitigate risks that can cause damage to the organization whether it is financial or reputational. These jobs require a fundamental understanding of financial markets in order to establish, monitor and evaluate appropriate policies, procedures or risk mitigation strategies. Risk management roles can be thought of according to three core functions: Copyright 2010 Toronto Financial Services Alliance. All rights reserved. 1
! Policy setting involves establishing risk policies that assess the risks that the organization is willing to accept to achieve its objectives and the strategies to avoid potential risks. o Roles in this function tend to be at the senior level, have a broad view, and a comprehensive understanding of the organization and its environment.! Enactment involves the execution and enforcement of an organization s risk policy, and may include the monitoring, assessment and mitigation of risks, as well as development of risk models to evaluate different event scenarios. o Roles in this function tend to be at the mid-to-senior level. For example, in the credit and operational risk areas, roles require a comprehensive understanding of risk management methods, principles and tools. For Operational risk, enactment is typically performed through compliance roles, which are featured separately. Market risk is enacted through the dissemination of information, policy recommendations and analyses to other risk functions (e.g. credit and operational).! Analysis involves conducting research and analyzing several risk factors and their potential implications. Information obtained through research and analysis is used in setting and monitoring risk policies, making individual decisions (e.g. lending), or constructing risk models. When more sophisticated models and thinking is used, analysts can provide the basis for the development and implementation of complex products (e.g. hedges) or transactions (e.g. complex credit, corporate-level insurance). Roles in this group range from entry-level to mid-level and often work under the direction of more senior roles as they work to gain experience and understanding of risk management. Analyst roles are key roles across credit, market and operational risk categories. The diagram below illustrates the roles across functions and risk types: Operational Credit Market Policy Setting VP Operational Risk VP Credit Risk Corporate Lending Director Market Risk Enactment Compliance Officer (see Compliance Group) Risk Modellers (Role #2 below) Adjudicators (Role #3 below) Provides information & Analysis & Research Risk Analysts (Role #1 below) What are the In-demand Careers in Risk? The following three roles are covered in this Group. Please note that Compliance roles are highlighted along with the Internal Auditing Group given the similarities in roles. Risks Analysts - conduct research and analysis on factors that contribute to risks (e.g. size of individual loans/corporate loan portfolio, level of foreign currency exposure. Risk Modellers use historical data and information from research analysis and subject matter experts to develop mathematical models using sophisticated computer programs. These models analyze and predict risk(s) that impact the organization. Copyright 2010 Toronto Financial Services Alliance. All rights reserved. 2
Risk Adjudicators evaluate the information from risk models, research from analysts as well as other relevant industry information to evaluate potential transactions in order to make decisions about whether or not to engage in the financial transaction(s). Part of this assessment includes an understanding of the corporate appetite for risk. Adjudicators must consider both internal corporate risk policies and external regulatory requirements (e.g. reserve/capital requirements) when making decisions about transactions. The focus of Risk management roles is typically within the organization, providing service to business lines. Junior roles can include modeling, analysis, and reporting. Senior roles typically include policy development, reporting across functions and greater interaction with external stakeholders (e.g. regulators). Risk management has become an increasingly important organizational function. The global financial crisis has highlighted the importance of robust financial risk management strategies and procedures. There has also been an increase in regulations thereby increasing the demand for risk management professionals to help organizations monitor and meet regulatory requirements. Financial services organizations are explicit in linking risk management to their business strategy and daily operating principles. Accordingly the demand for risk management roles of all types is increasing. New roles are emerging, particularly in areas of enterprise risk management, which takes a holistic view of corporate risk in the context of strategic and reputational risk across the various risk components (i.e. credit, market, operational, etc.). As a result there is ample opportunity within risk management field for growth and promotion into leadership potions. Where are the Risk Careers? Risk roles are to be found across all segments of Financial Services including: Banking Insurance Investment Within the banking segment, some areas of focus for risk managers may include:! Managing risks related to borrowing functions (loans, credit) and business and financial risks of assigned relationships/ accounts.! Ensuring the ongoing quality of the bank's overall risk profile positively influences the realization of the bank's asset growth and management. Within the insurance segment, there are two key areas of focus for risk managers:! Corporate risk, working with compliance and audit functions to ensure the organization has appropriate measures to identify and manage risks.! Product, asset and liability risk management analyzing and recommending risk mitigation strategies related to the management of investments as well as insurance products, policies and/or procedures. Within the investment management segment, including pension funds, some areas of focus for risk managers may include:! Corporate risk, working with compliance and audit functions to ensure the organization has appropriate measures to identify and manage risks! Pension fund management, working with portfolio managers as well as compliance and audit groups to ensure appropriate measures and strategies are in place to mitigate potential risks in managing the pension portfolios. Copyright 2010 Toronto Financial Services Alliance. All rights reserved. 3
What are the Typical Competency Requirements for this Job Group? Common requirements across risk management roles across the industry include:! Knowledge of how the organization or specific business functions operate.! Key characteristics of the services/products that are provided to clients.! Methodical and strong attention to detail, looking at micro and macro impacts of risk factors.! Strong quantitative analysis skills to apply technical knowledge to business practices and risk management principles.! Ability to apply quantitative and narrative skills to effectively communicate or convey key findings from analysis.! Current and in-depth knowledge of financial market conditions, including, market volatility and uncertainty and regulatory requirements.! Demonstrated track record of strong ethics in the context of regulatory and policy standards.! Educational backgrounds in Mathematics, Statistics, Finance, Economics, Actuarial Science or Legal. Representative Job Titles Banking Insurance! Manager Credit Adjudication (Corporate)! Analyst, Credit Adjudication (Corporate)! Analyst, Market Risk! Associate, Market/Credit Risk! Credit Risk Manager! Credit Risk Analyst! Market Risk Policy Analyst! Financial Modeller! Financial Engineer! Quantitative Analyst! Manager Model Vetting! Manager Credit Risk Models! Manager Risk Analytics! Risk Analyst! Risk Manager! Rules Maintenance Analyst! Senior Manager Credit Risk! Policy Analyst! Broker Compliance Analyst Copyright 2010 Toronto Financial Services Alliance. All rights reserved. 4
! Rules Maintenance Analysts! Risk Manager! Risk Measurement! Asset Liability Analyst! Asset Liability Manager Investment! Risk Manager! Capital Markets Risk Manager! Risk Actuary! Risk Modeller Copyright 2010 Toronto Financial Services Alliance. All rights reserved. 5