Advanced ERM Session 3: ERM Frameworks and Responses to risk

This presentation is based on a part of an academic course on Advanced Enterprise Risk Management (Advanced ERM) titled ‘ERM Frameworks and Responses to risk’ and covers topics such as: different types of risk (ERM) frameworks, the 2007-09 Credit Crisis (including policy responses), Basel II/III and Solvency II (including summary similarities and differences), Basel II and Basel III (banks), Solvency II (European insurers) and responses to risk

1Session 3: ERM Frameworks and Responses to risk
2Session 3: ERM Frameworks and Responses to risk
3There are many different Risk (ERM) frameworks
4ERM frameworks come in various types
5They often develop through time
6As does thinking behind them
7COSO: ERM - Integrated Framework
8COSO: ERM encompasses
9COSO: ERM components
10COSO: ERM objectives
11Choosing between ERM frameworks?
12Session 3: ERM Frameworks and Responses to risk
13The 2007-09 Credit Crisis
14Stages 1 and 2
15Stage 3: Counterparty mistrust
16Stage 4: Hubris always leads to nemesis?
17The 2007-09 Credit Crisis: Summary
18Session 3: ERM Frameworks and Responses to risk
19Basel II/III and Solvency II
20Trend towards principles-based regulation
21Current UK financial regulatory structure
22UK FSA, PRA, FCA Principles (Handbook/Rulebook)
23PRA’s Risk Framework
24Basel III and Solvency II
25Banks and insurers are also differently capitalised
26Basel III and Solvency II: Different histories / drivers
27Calculation of Required Pillar 1 Capital
28Session 3: ERM Frameworks and Responses to risk
29Basel II - Market risk
30Basel II - Market risk (ctd)
31Basel II - Credit risk
32Basel II - Operational risk
33Revisions to Basel II post crisis: overview
34Basel III capital requirements
35Revisions to Basel II post crisis: market risk
38UK-specific response
39(1) Turner viewed key drivers of crisis as
40(2) Recommendations included
41(3) On capital , accounting and liquidity
42(4) On Narrow banks versus Investment banks
43Differentiation linked to two main roles of money
44Another way of viewing proposed regulatory reforms
45(1) Enhance capital adequacy
46(2) Ring-fence activities linked to depositor protection
47(3) Existing investors to contribute more to bailouts
48(4) Make resolution of failing firms easier
49(5) Improve business behaviours
50Session 3: ERM Frameworks and Responses to risk
51Solvency II
52Involves a journey
53Solvency II - Summary drivers
54Example of uneven capital treatment across sectors
55Three pillars
56Generic balance sheet structure
57Solvency II aims to be market consistent
58Technical Provisions
59SCR and MCR
60Standard formula SCR stress tests
61Standard formula SCR Risk modules
62Standard formula SCR: Diversification
63Correlation matrix for BSCR in QIS5
64Components in Market, Default and Life risk modules
65Session 3: ERM Frameworks and Responses to risk
66Responses to risk
67Which risk metric to employ?
68What time horizon to focus on?
69What confidence level to choose (VaR / TVaR etc.)?
70Absolute versus relative risk (choice of benchmark)?
72Management responses to risk
73'Local' versus 'global' responses to risk
75Example way of identifying limits mathematically (1)
76Example way of identifying limits mathematically (2)
77Example output
78Limits - other observations
80Risk transfer
83Asset-liability management and asset allocation
84Liquidity management
85Alter flow of new business
86Session 3: Agenda covered
87Important Information

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