THE FINANCIAL
MOODYS AND STANDARD & POOR: ALL YOU NEED TO KNOW
Is there any Operational Risk Failures?
AND MORE!
PETROBRAS CRISIS!
Index Financial Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...1 Petrobras Financial Crisis.. . . . . . . . . . . . . . . . . . . . .. .. 4 Alcoa Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . ..7 Financial Ratios Analysis. . . . . . . . . . . . . . . . . . . . . . . ..8
AT&T. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 9 Navistar International. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 10
Commercial Credit Risk‌ . . . . . . . . . . . . . . . . . . . . . .14 What is Credit Risk?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Challenges to Successful Credit Risk Management . . . . . . .15 Best Practices in Credit Risk Management. . . . . . . . . . . . . ..16 Modeling Credit Risk for Commercial Loans. . . . . . . . . . . .16 Operational Risk: Changing Face of Compliance. . . . . . . . .17 Challenges of Managing Operational Risk. . . . . . . . . . . . . . 18 Building an Operational Risk Framework . . . . . . . . . . . . . . 19 What elements should a financial institution consider. . . . .20 when developing an analytical framework for operational risk?. . . . . . . . . . . . . ..20 Business Benefits: Moving Beyond Compliance. . . . . . . . . .21 Companies & Commercial Credit Risk. . . . . . . . . . . . . . . . . 22 Common Scores for Credit Risk . . . . . . . . . . . . . . . . . . . . . .23 Today about Commercial Credit Risk .. . . . . . . . . . . . . . . . . 24
Operational Risks. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Operational Risk Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Operational crises in financial institutions .. . . . . . . . . . . . . . . . . 32 How to successfully implement a wide operational risk management strategy to avoid Risk? . . . . . . . . . . . . . . . . . . . . . .33 Conlusions . . . . . . . . . . . ... . . . . . . . . . . . . . . . . 37
References. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
What are the financial Risks? “Financial risks is the possibility that shareholders will lose money when they invest in a company that has debt, if the company's cash flow proves inadequate to meet its financial obligations. When a company uses debt financing, its creditors are repaid before its shareholders if the company becomes insolvent. Financial risk also refers to the possibility of a corporation or government defaulting on its bonds, which would cause those bondholders to lose money.”
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ow with this being said, Financial Risk is one of the most, if not the highest priority risk a company has and thus its investors too. Financial risk can be caused by market movements, and market movements does include a share of factors that compose the term, it can be classified as the following; 1) Market Risk 2) Credit Risk 3) Liquidity Risk 4) Operational Risk Risks do subdivide in a lot of concepts and complicated terms and all of these concepts do help companies to avoid in a big manner to minimize the risks that they have in everyday activities, moving material, buying/ selling shares, starting new projects, doing practically anything in the company conveys a certain risk, let it be high, medium or low. With this being said, of course companies seek to have a better risk-management to avoid having high risks when they’re not needed.
There’s a compensation analysis called the risk-return spectrum which consists of the following; high risk equals high returns and low risk equals low returns. This spectrum has been known for centuries but it has been proved wrong several times, since it’s not always the case. As we might already know “Risk” does involve quite a lot of terms and those concepts breaks down into even more concepts and so forth, in this matter we’re just barely touching the surface since we’ll be taking a look at the different type of risks in a deeper manner in the next pages.
1
Below you will be able to see a map with the type of risks and a little more of information about them:
This is just a conceptual map showing the major risk concepts.
Now with all the information that we’ve been given now it’s clear there’s a lot of risks a company has to manage, but with this being said how does companies avoid them? As investors, how do you rely on the market after the financial crisis that happened back in November 2007? What was wrong with these over complicated models? Well, as I tis clear to say the crisis that happened back in 2007 was due a failure of risk management across several companies and even the big banks at the time. After what happened in 2007 risk management started to grow exponentially by obvious reasons, all companies and banks needed to re asses their risks patterns and this was widespread through the world. We need to understand that not all risks can be avoided, or else, all companies would be successful. But again, of course there’s several factors companies take into account to lower the risk, which is as follows;
1) Relying on Historic Data: Historical data is used throughout companies in several manners to forecast, supply and demand, between others, including of course risk management, last but not least. Clear example could be “The Big Short” the famous book and movie since the Dr Michael Burry took a look at the historical data on the real estate market and noticed that it would suffer a big decline in the demand since the people weren’t paying their mortgage, a security that all banks and wall street brokers assured that would never happen.
2) Focusing on Narrow Measures “Narrow measures” this concept focuses heavily on data analysis and how critical can it be for companies. As we are able to tell there are data, studies, models, spectrums, even the risk-assessment has been changing over the course of the years and this is because the market is always moving and changing thus the requirements of the models that we have today. One clear example can be VaR (Value-At-Risk) which is the most common way to assess the riskiness of securities or share trading in financial institutions, it measures the maximum amount of money you can lose at a given probability
3) O v e r l o o king Knowable Risks This one can be easily overlooked since it’s the most distinguishable market, credit and operational risks, of course they all measure differently, but companies do fail to assess risks when they assume risks aren’t correlated. One important matter to keep into mind is to make sure you have accounted for all the risks you know, and even so account the risks that you might not be fa-
4) Failing to Communicate This one is pretty much self-explanatory, communication failure was one of the major factors of the financial crisis that happened on November 2007, the reason for this is Dr Michael Burry published the information of his study to several financial institutions including Wall Street and big Bank Firms, but neither of them accepted the study as valid, and common Wall Street brokers saw his case study as not being able to compel, not being able to communicate an effective message for several reasons, first of all because the report was way too complex for the audience. 5) Not ging in
Real
manaTime
So far we’ve seen risk management as a term to capture risk at a certain time, and as I said earlier risk goes hand to hand with the market and thus it is a dynamic process, it needs to be captured in real time because just like the shares or the currency a simple shift in the market can make a share go from an all-time high of 160 USD to barely 40 USD per share.
PETROBRAS FINANCIAL CRISIS
A
clear example of everything we have talked about could be the Brazilian PetroBras (Petroleo Brasileiro or PBR). As the name implies, it is a company that involves in the commodity of oil and since the market of oil is collapsing to the present day it’s suffering huge hits. Moody's and Standard & Poor's rate Petrobras below investment grade and have negative outlooks on Petrobras. Its huge debt load tops $127 billion, while its leverage is approximately 6.28 times.
Petrobras is focusing efforts to improve its situation. The company has cut its investment plans for 2015 to 2109 by 24% "a drastic move for a firm that has always made efforts to be one step ahead of the competition when it comes to technology.
Petrobras has more than $100 billion in debt and a further downturn in the company could lead to widespread economic problems, given Brazil is one of the largest oil producers in the world just below the Middle East. The economy contracted 3.8 per cent in 2015 and is set to slide another 3.3 per cent this year, according to the International Monetary Fund, as the economy goes bust, and an interim government has replaced an elected government riddled by corruption and incompetence in equal measure.
At the heart of the trouble sits Petrobras, the country’s state-owned oil company, currently embroiled in a massive corruption scandal that has seen hundreds of arrests and convictions already and could set the company back by billions of dollars.
This security lasted shortly but it kept Mexico and Pemex afloat for some time. What does this tell us? Of course Mexico could’ve been better prepared for this commodity crisis but at least it wasn’t as bad as Brazil’s, since they didn’t have a proper forecast of the upcoming oil crisis the market was going to have, they didn’t monitor it live the way they were supposed to.
But, how could they know this oil crisis was coming? How would PetroBras or the Brazilian government be ready for these huge shifts in the market that happened so suddenly? In this specific case, everyone including even Mexico saw this coming, to be precise back since 2012 we bought a financial security for our barrels of oil to be sold at 80 USD as a fixed number even if the value of the barrels fell down, we paid millions of dollars for the security Mexico paid for, but back in 2014 when the price of the barrel of oil fell down by an outstanding amount, the only security keeping us afloat, barely but it was serving it function it was the security our government bought to secure the price of the commodity of our barrels of oil.
Another clear example could be Alcoa and the aluminum market, this risk can be quite deceiving because it’s a political risk, legal risk and governmental risk by the most part, why would you ask? Well in short, six hundred workers lost their jobs earlier in the current year when Alcoa was forced to close its aluminum smelter which had cranked out metal since early 1960s
What happened was there were way too low aluminum prices, down 20% last year amid a flood of supply from China. Chinese smelters supply half the world’s aluminum and, as the lifeblood of many small towns, enjoy subsidized power and taxes from local governments. But that may not be the only advantage they have. Aluminum trade groups have long contended the Chinese companies engage in more underhanded moves to evade import restrictions and anti-dumping laws.
Alcoa Crisis A Chinese aluminum company stockpiled more than $2 billion worth of aluminum in Mexico with intentions of shipping it to the U.S. to avoid tariffs on Chinese exports. This can be a clear issue with compliance on laws and legal risks since the Chinese company and its low reputation can go even lower than what it already is and it can be penalized by the scheme they tried to pull off, in the end this affected the US the same way it did Mexico since both countries had a decline on the metal commodity causing a lot of companies to fire personnel or even in some cases like Alcoa to shut down.
L A CI
N A FIN
Financial ratio analysis is an important topic in the top-modern companies, it marks the health of every company at a certain period of time. We will focus on the top 5 financial ratios of every company which are the following:
• Current Ratio: Important to investors to see if the firm has enough liquidity to cover its obligations. • Quick Ratio: Tests the company’s liquidity without the inventory of the company tested. • Return on Assets: Ideal for investors to know how much money they would gain in the future if they invest on the company. • Return on Equity: measures how much the shareholders earned for their investment in the company.
In this section we will discuss the financial ratios of two companies such as AT&T which is a leveraged company and Navistar which is a company nearly on the bankruptcy.
AT&T, Inc. First of all, we present the balance sheet of financial statement of AT&T on quarters till July 30th, 2016.
The first ratio is the Current Ratio which is measured by applying the following formula:
Current Ratio=(Current Assets)/(Current Liabilities) Current Ratio=35,992,000/47,816,000 Current Ratio=0.752718 In conclusion, AT&T has a medium risk in order to pay its own obligations at the moment. What are the possible solutions to this particular risk? Bank loan with a lower interest, aggressive marketing strategies, reducing administrative and interest expenses. The second ratio is the Quick Ratio which is measured by applying the following formula:
Quick Ratio=(Current Assets-Inventory)/(Current Liabilities) Quick Ratio=(35,992,000-0)/47,816,000 As you can see, the inventory on this ratio is calculated as 0, why? Inventory can’t be calculated because the stores of AT&T doesn’t even have products of the enterprise, they take the products from another manufacturer and sells it to the possible customers. In conclusion, we have the exact same result as the Current Ratio.
Quick Ratio=0. The third ratio is the Return on Assets Ratio which is measured by applying the following formula:
Return on Assets=(Net Income)/(Total Assets) Return on Assets=13,345,000/402,672,000 Return on Assets= 3%
The increase of selling and administrative expenses located on the Income Statement is extremely huge for AT&T, most of the income of the company is going through the Administrative areas. Solution: Reduce administrative expenses. The fourth ratio is the Return on Equity which is measured by applying the following formula:
Return on Equity=(Net Income)/(Total Equity) Return on Equity=13,345,000/123,402,000 Return on Equity= 10% The result of this ratio confirms that the return on equity for the enterprise is in a good way. If the company has this behavior, in 10 years will be paid by itself. The final ratio is the Debt Ratio which is measured by applying the following formula:
Debt ratio=(Total Liabilities)/(Total Assets) Debt ratio=278,406,000/402,672,000
This company is applying a plan of leverage in order to fulfill its own interest, the amount of debt is serious but considering the type of services they sell, it can be manageable. Solution: Reduce a certain amount of debt in order be more easy and accessible to take control of it.
Navistar International Corporation
For Navistar International Corporation, we present the balance sheet of financial statement of AT&T on quarters till December 31st of 2015.
The first ratio is the Current Ratio which is measured by applying the following formula:
Current Ratio=(Current Assets)/(Current Liabilities) Current Ratio=4,622,000/3,788,000 Current Ratio=1.22016 Navistar can pay its own obligations at the end of the year of 2015. The current ratio shows that this company is healthy and can confront its financial problems through the next years. The second ratio is the Quick Ratio which is measured by applying the following formula:
Quick Ratio=(Current Assets-Inventory)/(Current Liabilities) Quick Ratio=(4,622,000-1,135,000)/3,788,000 Quick Ratio=0.92 The result of the quick ratio leads us that the company can pay its own obligations but with the inventory, without the inventory, the company can’t pay them. If something strange happens in the market, this company would be in serious problems and it won’t pay its current liabilities on liquid assets.
The firm doesn’t have at the moment return on assets which leads us to say that this company is currently dying and going in a slow speed but with a big risk of a possible bankruptcy on the future. Solution: Aggressive ting strategies, boost the
marketrademark.
The fourth ratio is the Return on Equity which is measured by applying the following formula:
Return on Equity=(Net Income)/(Total Equity) Return on Equity=(-184,000)/(-5,167,000) Return on Equity= -3% As it was said before, the current company is dying and leading for a possible bankruptcy. Solution: Aggressive ting strategies, boost the
marketrademark.
Debt ratio=(Total Liabilities)/(Total Assets) Debt ratio=11,859,000/6,692,000 Debt ratio= 177%
The third ratio is the Return on Assets Ratio which is measured by applying the following formula:
Return on Assets=(Net Income)/(Total Assets) turn on Assets=(-184,000)/6,692,000 Return on Assets= -2%
Re-
Navistar is currently on a serious problem of debt and payment of its own liabilities. This ratio confirms that the company has a major risk of having a bankruptcy on the future.
Commercial Credit Risk
Credit Risk Challenges and Management What is Credit Risk? Credit risk refers to the probability of loss due to a borrower’s failure to make payments on any type of debt. Credit risk management, meanwhile, is the practice of mitigating those losses by understanding the adequacy of both a bank’s capital and loan loss reserves
To comply with the more stringent regulatory requirements and absorb the higher capital costs for credit risk, many banks are overhauling their approaches to credit risk.
But banks who view this as strictly a compliance exercise are being short-sighted. Better credit risk management also presents an opportunity to greatly improve overall performance and secure a competitive advantage.
The global financial crisis – and the credit crunch that followed – put credit risk management into the regulatory spotlight. As a result, regulators began to demand more transparency. They wanted to know that a bank has thorough knowledge of customers and their associated credit risk. And new Basel III
Challenges to Successful Credit Risk Management • Inefficient data management. An inability to access the right data when it’s needed causes problematic delays. • No group-wide risk modeling framework. Without it, banks can’t generate complex, meaningful risk measures and get a big picture of group-wide risk. • Constant rework. Analysts can’t change model parameters easily, which results in too much duplication of effort and negatively affects a bank’s efficiency ratio. • Insufficient risk tools. Without a robust risk solution, banks can’t identify portfolio concentrations or re-grade portfolios often enough to effectively manage risk. • Cumbersome reporting. Manual, spreadsheet-based reporting processes overburden analysts and IT.
Best Practices in Credit Risk Management The first step in effective credit risk management is to gain a complete understanding of a bank’s overall credit risk by viewing risk at the individual, customer and portfolio levels. While banks strive for an integrated understanding of their risk profiles, much information is often scattered Better model management that spans the entire among business units. Without a thorough risk assess- • modeling life cycle. ment, banks have no way of knowing if capital reserves Real-time scoring and limits monitoring. accurately reflect risks or if loan loss reserves adequately • • Robust stress-testing capabilities. cover potential short-term credit losses. Vulnerable • Data visualization capabilities and business inbanks are targets for close scrutiny by regulators and telligence tools that get important information into the investors, as well as debilitating losses. The solution hands of those who need it, when they need it. should include:
How does Credit Risk behave in the Market? Modeling Credit Risk for Commercial Loans The regulators of financial companies and banks are demanding a far greater level of insight and awareness by directors about the risks they manage, and the effectiveness of the controls they have in place to reduce or mitigate these risks. This has led to an increased emphasis on the importance of having a sound operational risk management (ORM) practice in place, especially when dealing with internal capital assessment and allocation process. This makes ORM one of the most complex and fastest growing risk disciplines in financial institutions. Banks and financial institutions are undergoing a sea change and today face an environment marked by growing consolidation, rising customer expectations, increasing regulatory requirements, proliferating financial engineering, uprising technological innovation and mounting competition. This has increased the probability of failure or mistakes from the operations point of view – resulting in increased focus on managing operational risks.
Operational risk losses have often led to the downfall of financial institutions, with more than 100 reported losses exceeding US$100 million in the recent years. The regulators of financial companies and banks are demanding a far greater level of insight and awareness by directors about the risks they manage, and the effectiveness of the controls they have in place to reduce or mitigate these risks.
Operational Risk: Changing Face of Compliance
Old perceptions and behaviors towards risk are changing. ORM is acquiring new credibility as a roadmap to add value to the business; and is garnering new attention from regulators and key stakeholders. A recent Chartis Research's1 report on ORM systems, suggests that the worldwide financial services ORM market will continue to grow. This indicates a growing concern among banks and financial institutions for managing their operational risk. The report has three main findings:
There are two main drivers for this development. Firstly, there is a growing acknowledgement from banks that a consistent and effective operational risk management framework can help them achieve organizational objectives and superior performance. For example, by including a well-constructed operational risk process in the entire value chain, a bank can help ensure that the risks inherent in those activities are understood and addressed. In many instances an early involvement of operational risk management can increase the development speed of new initiatives.
• Many US and European financial institutions continue to replace their first generation ORM systems - largely due to inflexible and rigid product design and the ongoing evolvement of ORM methodologies. • Some market segments, such as emerging regions (e.g. Middle-East, Asia-Pacific, South America), and vertical sectors (e.g. insurance, asset management) have begun investing in formal and sophisticated ORM systems. • Average investment in ORM projects is increasing, as more and more financial institutions are focusing on ORM's strategic business benefits • Additionally, the report claims financial institutions working on the demand side of the market are reexamining their approach, culture and systems for managing operational risk.
• The second key development is the launch of the Basel II Capital Accord (the New Accord) by the Basel Committee for Banking Supervision, which requires banks to set aside regulatory capital for operational risk an important development that has affected most financial services institutions worldwide. One of the major improvements in Basel II is that it ensures closer linkages between capital requirements and the ways banks manage their actual risk To comply with the accord, banks are making significant investments to improve their internal risk processes, data infrastructure and analytical capabilities. Firms focused on competing effectively are already incorporating many elements of the Basel II requirements into their risk and capital management practices, as a blueprint of improved growth and profitability.
The discipline of operational risk is at a crossroads. Despite the industry's efforts to control operational risk, institutions still have much work to do. Risk Managers are grappling with questions like, ‘How does the discipline add value to my organization?’; ‘What does the advanced measurement approach’s (AMA) modeling techniques say about the operational risks my firm is facing?’; ‘What is the strategic role of operational risk my firm should adopt?’. Let’s take a look at some of the unique challenges that ORM brings:
• Implementing ORM Systems: Amid regulatory efforts to re-vamp the industry’s immunity to operational risk, and its implications on efficient financial intermediation, many organizations are looking to go beyond traditional solid approaches and implement a consolidated ORM framework across entire value chain. • Tone at the Top: Effective risk management program starts with “The Tone at the Top”- driven by the top management and adhered by the bottom line. However, if bank’s top leaders perceive operational risk management solely as a regulatory mandate, rather than as an important means of enhancing competitiveness and performance, they may tend to be less supportive of such efforts. Management and the board must understand the importance of operational risk, demonstrate their support for its management, and designate an appropriate managing entity and framework - one that is part of the bank’s overall corporate governance framework.
Challenges of Managing Operational Risk
• Rising Costs of Compliance: Development of an ORM model as part of a regulatory and economic capital framework is complex and takes time. There is a general agreement that the major ORM challenge is escalating cost of compliance. • Access to Appropriate Information and Reporting: Effective management of operational risk requires diverse information from a variety of sources-including, for example, risk reports, risk and control profiles, operational risk incidents, key risk indicators, risk heat maps, and rules and definitions for regulatory capital and economic capital reporting. • Development of Loss Databases: A well-structured operational risk framework requires development of business-line databases to capture loss events attributable to various categories of operational risk. • Lack of Systematic Measurement of Operational Risk: Many enterprises hold that their institutions are measuring operational risk. However, very few of them have been able to complete the Basel II quantification requirements, or yet to formalize the measurement process around the Basel II framework
Building an Operational Risk Framework Operational risk management is at the core of a bank's operations - integrating risk management practices into processes, systems and culture. As a pro-active partner to senior management, ORM's value lies in supporting and challenging them to align the business control environment with the bank's strategy by measuring and mitigating risk exposure, contributing to optimal return for stakeholders. The ORM group of an organization keeps its people up-to-date on problems that have happened to other financial institutions, allowing it to take a more proactive approach. "Our goal is for employees to look at ORM as a business stakeholder and a shareholder, involving them on all levels and bring stability into their jobs," said senior vice president of Operational and Compliance Risk Management Group. A noted financial services company, on the other hand, incorporates its ORM approach as an extension of its business line and not a separate entity
The company has implemented an operational risk umbrella that encompasses all aspects of potential risks - bank protection, fraud prevention, key risk indicators, capture of operational loss data, business line risk oversight and new products and initiatives for data security. Its Chief Risk officer quotes, "We utilize our ORM practices to gain respect and appreciation of all our business lines by really understanding their issues, and being part of the overall solution."
What elements should a financial institution consider when developing an analytical framework for operational risk? There is no ‘one-size-fits-all’ approach to ORM – as every enterprise follows a framework that is specific to its own internal operating environment. When inquired about the standard ORM framework, a risk expert notes, “There is no "standard" standard. Understanding our risks should lead to better decision making and reflect in our performance”. A robust operational risk management framework is made up of the following core components:
Governance: It is the process by which the Board of Directors defines key objectives for the bank and oversees progress towards achieving those objectives. It defines overall operational risk culture in organization, and sets the tone as to how a bank implements and executes its operational risk management strategy. Governance sets the precedent for Strategy, Structure and Execution. Strategy: A bank’s strategy for operational risk drives the other components within the management framework and provides clear guidance on risk appetite or tolerance, policies, and processes for day-today risk management.
Appetite and Policy: An ideal risk management process ensures that organizational behavior is driven by its risk appetite. Adopting an operational risk strategy aligned to risk appetite, leads to informed business and investment decisions. Clear Definition & Communication of Policy: An organization’s top management must identify, assess, decide, implement, audit and supervise their strategic risks. Periodic Evaluations Based on Internal & External Changes: An ideal risk management process puts improvement of risk performance on a competitive level with other important mission concerns – periodically evaluating the ORM performance goals in the light of internal and external factors. Depending upon the criticality of internal operating environment and key external factors, organization must review the strategic policies inside out. Structure: When designing the operational risk management structure, the bank's overall risk scenario should serve as a guideline. This includes initiatives like laying down a hierarchical structure that leverages current risk processes, developing risk measurement models to assess regulatory and economic capital, and allocating economic capital visà-vis the actual risk confronted. Execution: Once operational risk management structure have been established by an organization adequate procedures should be designed and implemented to ensure execution of and compliance with these policies at business line level. The first step includes identification and assessment of operational risk inherent in dayto-day processes of the bank. After assessment of inherent risk, target tolerance limit of risk should be established.
Finally appropriate risk mitigation and internal controls procedures are established by the business units such that residual risk is mitigated to the acceptable level. Regular reviews must be carried out, to analyze the control environment and test the effectiveness of implemented controls, thereby ensuring business operations are conducted within acceptable risk limits. Further, it is essential that the top management ensures consistent monitoring and controlling of operational risk, and that risk information is received by the appropriate people, on a timely basis, in a form and format that will aid in the monitoring and control.
Operational risk metrics or “Key Risk Indicators” (KRIs) are established to ensure timely warning is received prior to the occurrence of an event. Key to effective KRIs lies in setting threshold at the acceptable level of risk. Execution and implementation of Operational Risk framework is key to setting up effective Operational Risk environment ensuring that business is conducted within appropriate risk tolerance limit.
Business Benefits: Moving Beyond
As ORM efforts mature, and gain both the support and the confidence of management, they are becoming increasingly valuable to the business. Perceived initially to support regulatory requirements, these efforts can be leveraged and aligned with business performance management. To be successful, however, such alignment must be based on a clear vision of the potential benefits. Few of the benefits are discussed below: • Identified and assessed key operational risk exposures: ORM enables an organization to identify measure, monitor and control its inherent risk exposures of the business at all levels. Elements like Risk Assessment, Event Management, and Key Risk Indicator play an important role; enabling the organization to evaluate the risk controls, based on the identified inherent risk, and to measure the residual risk which remains after the implementation of controls. • Clarified personal accountabilities, roles and responsibilities for managing operational risks: Clear cut specification of roles and responsibilities of personnel regarding risk profile is an imperative part of implementing an integrated ORM framework. It not only streamlines the risk management process, but also allows risk managers to better incorporate accountability into the work culture of the organization. • Evolved and enabled efficient allocation of operational risk capital: With streamlined risk management process, efficient allocation and utilization of operational risk capital can be ensured.
• Consistent and timely operational risk management information and reporting capabilities: Through the development of a well-tailored risk management strategy, a robust ORM system supports features like role-based dashboards, control diagrams and scorecards that provide visibility into the ongoing risk management efforts and bring high-risk areas into focus. • Sustained risk-smart workforce and environment: Application of an ORM framework, in conjunction with related risk management activities, will support a cultural shift to a risk-smart workforce and environment in the organization. An essential element of a risk-smart environment is that it ensures that the organization has the capacity and tools to be innovative while recognizing and respecting the need to be prudent in protecting its interest. • Ensured continuous risk management learning: Most business units today acknowledge that continuous learning is fundamental to more informed and proactive decision-making; and a successful learning organization must align itself to the businesses it supports. To ensure continuous risk management learning, these business units are sharing their experience and best risk management practices - internally and across organizations. This supports innovation, capacity building and continuous improvement, and fosters an environment that motivates people to learn. However, successfully navigating the road from compliance to value creation can be daunting without a roadmap and a clear vision. By taking a holistic approach to ORM an organization can significantly lower its risk profile and improve responsiveness to risk scenarios leading to strategic and operational benefits.
Companies & Commercial Credit Risk Credit Risk or Default risk is driven by credit rating and these credit ratings are set by rating agencies organizations. Banks issue commercial credit to companies, which then access funds as needed to help meet their financial obligations. Companies use commercial credit to fund daily operations and new business opportunities, purchase equipment, or cover unexpected expenses.
Rating Agencies
Moody’s (1909) American business and financial services company. It is the holding company for Moody's Investors Services, also catalogued mainly as an American credit rating agency, and Moody's Analytics another company that provides financial analysis software and services. It’s one of the most known companies on providing financial services and security on assessing credit risk matters.
Another company that’s leading index provider and the foremost source of independent credit ratings. S&P is best known due to its 500 Index; which is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. It’s the favorite for companies because is perceived as more representative of the market.
Standard’s & Poor
Dun & Bradstreet (1841) Provides commercial data to businesses on credit history, business-to-business sales and marketing, counterparty risk exposure, supply chain management, lead scoring and social identity matching. It was the first company founded in this branch from 1840s and gave the entrance several years later to the most known companies in credit risks and others, such as companies mention above, Moody’s and St’s and Poor. The company started to create a network of correspondents who would provide reliable, objective credit information to subscribers.
Common Scores for Credit Once companies decide the credit risk to take, it is important to know in which rating the company is having the credit and then determine how risky it can be. There are several credit ratings and valuated by letters: A, B and C. Each of them has its subsequent categorized as the degree of meeting the financial commitments. Some companies give rating outlooks that can be positive, negative, stable or No Meaningful to assess the potential credit on long term. There is certain score models to evaluate risks, plus the ratings mention above given by the rating agencies. There are 2 methods to talk about:
PAYDEX SCORE Business credit score that’s generated by Dun & Bradstreet (D&B). Their model analyzes a business’ payment performance (paying the bills on time) and gives it a numerical score from 1 to 100, with 100 signifying a perfect payment history. It helps lenders, vendors and suppliers determine whether to approve you for financing and on what terms; so the fast you pay bills, the higher score.
Paydex Score: Explanation: 100 90 80 70 60 50 40 30 20 1 – 19
Payment comes 30 days sooner than terms Payment comes 20 days sooner than terms Payment comes on terms Payment comes 15 days beyond terms Payment comes 22 days beyond terms Payment comes 30 days beyond terms Payment comes 60 days beyond terms Payment comes 90 days beyond terms Payment comes 120 days beyond terms Payment comes over 120 days beyond terms EMMA SCORE A judgmental risk score developed for use in Emerging Markets, as an initial risk assessment tool, eventually to be replaced by an empirically derived score when sufficient data is present in that market. It utilizes all available commercial data on that company, and applies judgmental modeling methodologies and local market expertise to assign the proper weights. In this case, EMMA score ranges from 1 to 10 across all markets, with 1‐3 considered as low risk, 4‐7 as medium risk and 8‐10 as high risk. 1 2 3
Low Risk. Min. Or no manual required
4 5 6
Medium risk. Manual review recommended.
7 8 9 10
High risk. Manual review required.
Today about Commercial Credit Risk The hidden cost of operaMoody’s Analytics Launches the RiskBench™ Platform for Benchmarking and Analyzing Commercial Credit Risk As far as it is know about rating agencies, analysis of date and credit risk is highly important for companies in order to know how’s doing the business. Moody’s credit agency has its other side of the coin, Moody’s Analytics, a leading provider of credit analytics and data. Today it announced the launch of the RiskBench™ platform, an innovative solution for benchmarking and analyzing credit portfolios. Credit market participants can use the RiskBench platform to improve monitoring of portfolio risk, to evaluate market expansion opportunities, and to estimate expected credit losses. The RiskBench platform’s visual and interactive dashboards were developed with QLIK® Sense, enabling users to monitor and benchmark the performance and characteristics of loan portfolios against relevant peers. Risk professionals can also use the platform to model impairment provisions required under the IFRS 9 and CECL accounting standards, and to analyze portions of their loan portfolios where they lack granular data.
With the credit environment becoming increasingly dynamic and interconnected across markets and asset classes, opportunities abound for firms to better leverage next generation platforms and global credit data and analytics within a coherent framework, that’s why this platform could develop a new way of getting the analysis better and faster.
Operational Risk According to the Bank for International Settlements operational risk management is define as the risk of loss resulting from inadequate or failed internal process, people and systems or from external events. This includes legal risk but is not limited to, exposures to fines, penalties, or punitive damage threat faced by financial and nonfinancial institutions. For example banks have always had to protect themselves from key threats to their operations, such as bank robbery and white-collar fraud. But until recently, the management of these threats focused on practical techniques for minimizing the chance of loss.
Operational Risk
Strategies in company is a really important subject, during the last decade operational risk have been increasing in the process of analysis inside a company logistics, however, there are several consequences that take place in the operational side of a company, it is important that companies create a culture of awareness regarding this operational risks that everyone is exposed to. There are different types of operational failures: People Risk, Process Risk, Model Risk, Transaction Risk, Operational Control Risk, Systems and technological Risk and External Events. First of all, operational risk is inherent in all banking products, activities, processes and systems, operational risk management is a reflection of the effectiveness of the board and senior management in administering its portfolio of products, activities, processes, and systems.
The Basel II Capital Accord helpfully considers that the bank ultimately maps their specific loss event as follows: Internal fraud, External fraud, Employment practices and workplace safety, Clients, products, and business practices, Damage to physical assets, Business disruption and system failure Execution, and delivery process management. In most banks, the methodology for translating operational risk into capital is developed by the group responsible for making risk-adjusted return on capital calculations in partnership with the operational risk management group. Mechanisms for attributing capital to operational risk should be risk based, transparent, scalable, and fair.
One major factor distinguishes operational risk from both market risk and credit risk. In making risk/ reward decisions, a bank can often expect to gain a higher rate of return on its capital by assuming more market risk or credit risk, with these types of risk, there is a trade-off between risk and expected return. A bank cannot generally expect to gain a higher expected return by assuming more operational risk; operational risk destroys value for all claimholders. This might suggest that banks should always try to minimize or mitigate operational risk. However, trying to reduce exposure to operational risk is costly Risk management generally encompasses the process of identifying risks to the bank, measuring exposures to those risks (where possible), ensuring that an effective capital planning and monitoring programmer is in place, monitoring risk exposures and corresponding capital needs on an ongoing basis, taking steps to control or mitigate risk exposures and reporting to senior management and the board on the bank’s risk exposures and capital positions. Internal controls or operational control risk is typically embedded in a bank’s day-to-day business and are designed to ensure, to the extent possible, that bank activities are efficient and effective, information is reliable, timely and complete and the bank is compliant with applicable laws and regulation.
In practice, internal governance forms the foundation of an effective operational risk management Framework. Although internal governance issues related to the management of operational risk are not unlike those encountered in the management of credit or market risk operational risk management challenges may differ from those in other risk areas.
Principles of Operational Risk Management (ORM) The Principles for the Sound Management of Operational Risk, which was originally issued in 2003 as Sound Practices for the Management and Supervision of Operational Risk, highlights the evolution of operational risk management over this period. The principles outlined in the report are based on best industry practice and supervisory experience and cover three overarching the governance, risk management and disclosure. Principle 1: The board of directors should take the lead in establishing a strong risk management culture. The board of directors and senior management should establish a corporate culture that is guided by strong risk management and that supports and provides appropriate standards and incentives for professional and responsible behavior.
Principle 2: Banks should develop, implement and maintain a Framework that is fully integrated into the bank’s overall risk management processes. The Framework for operational risk management chosen by an individual bank will depend on a range of factors, including its nature, size, complexity and risk profile. Principle 3: The board of directors should establish, approve and periodically review the Framework. The board of directors should oversee senior management to ensure that the policies, processes and systems are implemented effectively at all decision levels. Principle 4: The board of directors should approve and review a risk appetite and tolerance statement for operational risk that articulates the nature, types, and levels of operational risk that the bank is willing to assume. Principle 5: Senior management should develop for approval by the board of directors a clear, effective and robust governance structure with well defined, transparent and consistent lines of responsibility. Senior management is responsible for consistently implementing and maintaining throughout the organization policies. Principle 6: Senior management should ensure the identification and assessment of the operational risk inherent in all material products, activities, processes and systems to make sure the inherent risks and incentives are well understood.
Principle 7: Senior management should ensure that there is an approval process for all new products
Principle 8: Appropriate reporting mechanisms should be in place at the board, senior management, and business line levels that support proactive management of operational risk.
Principle 9: Banks should have business resiliency and continuity plans in place to ensure an ability to operate on an ongoing basis and limit losses in the event of severe business disruption. Principle 10. A bank’s public disclosures should allow stakeholders to assess its approach to operational risk management.
Many companies regard the funds they allocate to meet the regulatory requirements concerning operational controls as money well spent. Avoiding operational risks—either dramatic (embezzlement and loan fraud, for example) or mundane (such as regulatory compliance)—can prevent sizable losses from damages, fines, and sullied reputations. Yet few companies think strategically about operational controls. Executives typically view paying a fine, for example, or reaching a settlement in a court case as merely the cost of staying in the game. They approach operational-risk measures not as exemplary management practice but as regulatory requirements that should be dispatched with a minimum of fuss. Perhaps they should think again. Many companies underestimate the long-term effect of these events on their market value. Indeed, recent McKinsey research shows that a company’s loss from such a crisis pales beside the eventual loss to shareholders. And it’s not necessarily the biggest missteps that deliver the biggest blows; share prices can plummet as a result of even the smallest events Corporations can take a better-informed and more systematic approach to preventing operational-risk crises—and to protecting shareholder value when they do occur. Certain organizational changes and processes will promote a more rapid and candid response and reinforce measures to prevent similar events from recurring.
The hidden cost of operational Risk
Operational crises in financial institutions The experience of the financial-services industry yields useful insights into the longterm effects of operational risk. Financial institutions are particularly vulnerable to events that make them appear risky in the eyes of their customers. Moreover, they typically have a wealth of data to call on as well as strict reporting standards. In general, these companies base their risk calculations and allocate their capital on the probability that a particular incident will occur and the size of the resulting financial loss—the sum pocketed by an embezzler, for instance, or the fine for breaking a rule. At present, few banks factor potential market losses into their operational-risk-management plans or capital allocations, for example. We analyzed more than 350 operational-risk incidents1at financial institutions in Europe and North America and found that as news of a crisis reached the market, the initial declines were limited to levels in line with the actual fines, settlements, and monetary losses. Yet over the next 120 working days, the total returns to shareholders (TRS) of our sample declined by a whopping $278 billion, more than 12 tiMoreover, we found that the size of the loss varied with the kind of operational crisis that caused it. First, we organized the 350-plus incidents in our sample into a number of categories. We then analyzed those categories that included more than 20 incidents— enough to yield reliable, in-depth results. Five types of crises led to the harshest responses from the market, look at the next image that I like to call the 5 deadly sins:
1. Embezzlement. This type of internal fraud appears to have a contradictory effect on corporate market valuations: a net gain around the date when the event is first revealed but an eventual 3.5 percent loss in market value. 2. Loan fraud. The market value of companies reporting losses from borrowers that fraudulently obtained credit and later defaulted declined by 3.5 percent of TRS. 3. Deceptive sales practices and concealment. The market reacts negatively to penalties—such as those resulting from misleading equity research or from miscalculated pension annuities—handed down by regulatory bodies or civil courts. Recovery, if it occurs at all, is short-lived, and companies can lose as much as 5.5 percent of their TRS over the next 120 working days. 4. Antitrust. Settlements are negotiated in suits brought against companies for price-fixing in, for example, commodity, credit card, or equities markets. The companies involved in such events lost 3.5 percent of their market value in the month following a settlement. Most of them subsequently recovered their losses, however. 5. Compliance. Imminent fines for various forms of malpractice can generate losses even before they take effect. The market reaction after a fine can shave an additional 5.5 percent off shareholder value—though there can be some recovery after three months.
The way companies communicate information about such events to investors can delay or exacerbate the market’s response. European markets tend to overreact at first, perhaps in the absence of readily available information, and assume the worst until contrary evidence emerges; in contrast, the immediate response of US investors is commensurate with the actual loss. As more information emerges, the market continues to respond. Investors in both Europe and the United States assume that the losses exceed the amounts reported, perhaps in the belief that such events signify general mismanagement and herald further losses (possibly too small to report) that will affect the company’s future ability to create value. This negative reaction levels out at some point, as investors either forget the event or come to believe that the problem has been corrected.
How to successfully implement a wide operational risk management strategy to avoid Risk?
It exists a series of key elements that financial institutions follow in order to avoid unnecessary risk on their strategies, they are known as the key elements in Banks of ORM.
The Key in Banks The Eight Key Elements in Bank Operational Risk Management are necessary to successfully implement a bank wide operational risk management framework and the associated operational risk models They involve setting policy and identifying risk on the basis of an agreed upon terminology, constructing business process maps, building a best-practice measurement methodology, providing exposure management, installing a timely reporting capability, performing risk analysis (inclusive of stress testing), and allocating economic capital as a function of operational risk. These key elements are consistent with the sound operational risk management principles that, according to the Basel Committee, should be adopted by all banks, regardless of their size, level of sophistication, and nature of their activities.
Elements of ORM.
The first element is the basic idea to collect data for each operational risk and then subsequently try to fit the causes to them. The methodology for describing cause and effect is typically developed after the data have been collected. The second element is to establish a common language of risk identification. This common language can be used during either qualitative self-assessments executed by business management (and validated by the risk management function) or statistical assessment. The third element is to develop business process maps for each business. It would include analyzing the products and services that each organizational unit offers and the actions that the bank needs to take to manage operational risk. The fourth element is to develop a comprehensive set of operational risk metrics. The fifth element is to decide how to manage operational risk exposures and take appropriate action to hedge the operational risk. The sixth element is to decide how to report exposures. The bank will have to decide which operational risk numbers are the most useful for senior management and the board when tracking the bank’s firm wide operational risk profile. The seventh element is to develop tools for risk analysis and procedures for when these tools should be deployed. The bank must develop appropriate measures for exposure, up-to-date databases of internal and industrywide operational loss data, well-designed scenario analyses.
The eighth element is to ensure appropriate attribution of operational risk capital to every business Well before banks began to develop ways of measuring operational risks, they employed insurance contracts to mitigate the effects of key operational risk events. It is common for a bank to purchase insurance to protect itself from large single losses arising from acts of employee dishonesty, robbery and theft, loans made against counterfeit securities, and various Insurance protection for low-probability but highly severe losses such as these is available through contractually written insurance agreements, including an insurance vehicle known as the “financial institution bond and computer crime policy.” There also remains the danger that the insurance company will fail to pay out on an insurance policy that the bank is depending on for protection. The bank’s overall methodology for operational risk measurement and management needs to capture, through discounts and haircuts in the amount of insurance recognition, residual risks such as the remaining life of the insurance policy chance of policy cancellation and nonrenewal, uncertainty of payment, and mismatches in coverage of insurance policies. Doing a review of what we have read the role of board of directors it’s important in relation to operational risk management. This relation refers to a management structure composed of a board of directors and senior management.
.The Committee is aware that there are significant differences in legislative and regulatory frameworks across countries as regards the functions of the board of directors and senior management. Owing to these differences, the terms “board of directors” and “senior management” are used in this paper not to identify legal constructs but rather to label two decision-making functions within a bank. Also the role of Insurance is now an important tool for banks to examine, insurance cannot offer a complete answer to the problem of operational risk; it is simply one weapon in an armory that must contain a commitment to best-practice internal controls, operational risk measurement, key risk drivers, and risk capital.
Operational crises can be unexpectedly costly and potentially catastrophic events. Organizations in every industry can reduce their exposure only by understanding the different kinds of operational risks they face and the extent of their potential losses. Many companies will need to develop a more informed and systematic approach to managing operational risk before they can achieve that understanding.
CONCLUSIONS MARIANA AUSTRIA MAREZ 1543533 CONCLUSION
The risk in the market represent an important variable to be aware off at the moment of analyzing the pro and cons of an investment in a new region, markets can be divided in countries, population, people, ages, governments, laws, etc; and the combination of those variables and more represent an important factor that companies do pay attention when they do a market research, the objective of this project was to represent an hypothetic scenario of a new investment made for an “x” company in a new region and what variables they need to take in count to cover all the possibilities of results due to the lack of investigation skills.
During this magazine we cover topics like financial risks, financial ratios analysis, commercial credit risk and operational risk, in every section we covered things as news, small investigations, key elements to cover your company from risk and methodologies that will help your company to grow. During the topics covered in class we analyzed new things like “operational risk” this topic was specifically hard to investigate due to the lack of investigation and documentation of cases of some trustable organisms or resources. The methodology that we followed during the make in process of this magazine helped us to understand the relation between a market research investigation, cultural and economic variables that a region planning does when they do a new market introduction movement or investment. At the end of the day the magazine cover topics of new scenarios that a small, medium or even large sized company will like to know before they realize a new market penetration strategy, the effort and variables that we indeed tried to cover were very rich and sufficient to deliver a quality job. The information that I personally acquired during the elaboration of this PIA was something that consolidated the topics viewed in class, operational risk, and credit risk are phenomenon that some global economies faced during the last decades and created a whole new global panorama, we need to learn from those mistakes and try to avoid the risks mentioned in our work at all cost, it does not exist something like: “I am prepared enough for this”, there is always something new to take in count.
ANGEL MISAEL GARZA ESTUPIÑAN 1581439 CONCLUSION
The reality of the economic models that the global economy follows nowadays is the result of a series of events that led our culture to a whole new perspective of how to manage our finance and our companies. During the elaboration of this final project I could discovered new methodologies that companies may take in count in order to find a resolution to the problems that they may be presenting. However, the information collected in this magazine goes beyond hypothetical scenarios where an “x” company tries to invest in a new foreign markets; research, new methodologies for investigations, articles made by economists regarding specific topics or credit risk models, key elements in models in order to avoid unnecessary risk in operations and different processes that take place in the industry. However the make in process of this specific magazine in this semester as final project was quite interesting due to the material and topics that we learned during the course of this 5 months in class. The section of commercial credit risk was a whole challenge to investigate due the amount of information related to the situations that took place during the financial crisis of 2008; the analysis of the new strategies that financial institutions followed were bigger and deeper in different aspects, however the elaboration and design of the view of this information was not a really hard deal.
I learned that every economic model has an aspect where everything can go well or leave it in a really bad situation. It does not matter how many times you try to change variables everything can go wrong if someone tries to play to “the smart guy” with the global economy, that’s what happened in the Houses Credit Crisis in United States 8 years ago. History speaks by itself, and during this project I learned that it can give us more lessons than what we even imagine. This magazine goes beyond a PIA, it has the effort of each one of the members of our team, and each one of them has a new perspective, a different opinion and mentality regarding different topics and matter, and this magazines reflects the awesomeness in each one of us. I sincerely hope this job reflect a new sense of proudness in yourself dear reader and maybe that you could have learned something new today.
HOMERO ALEJANDRO JIMÉNEZ ARÉVALO 1552958 CONCLUSION
This project was quite interesting since most of my classmates including myself are work-ing already for a company, most of us since we´re bachelors we work for corporate offices or such, so to get to know these risks a company has on its everyday operations is not an easy task, and less so to actually lower the percentage of risks the company has. It´s quite intriguing because as we were able to notice with the case study we did, on how a fact so simple can cause such a big trouble in the global economy. Quick example could be the financial crisis of 2007-2008 and its recession. The incorrect risk management from the big banks, firms and Wall street brokers had in the real estate market caused this big crisis and recession, and all because they took for granted that US citizens would fare their mortgage every month without question, which wasn't the case and lead to a crisis for lend-ing money blindly to citizens which couldn't afford it. This crisis was due because almost no one kept in touch monitoring in real time the real estate payments and loans which was increasing significantly. Absolutely there's no way a company a company can reduce the risk by a 100%, compa-nies can only do so much since there's so many different type and kind of risks from oper-ational to legal and even governmental. So was the case of PetroBras and Pemex, gov-ernment-owned oil companies which faced a huge breakdown when the prices of the oil declined because of the pricing the Middle East was providing, Mexico´s state owned oil company, Pemex could lower down the risk by a huge margin due to securities they bought on the International Market which wasn't the case for PetroBras. With all the information we've gathered in this PIA it is quite clear on how important and crucial is proper risk-management in all kind of companies because a single shift in the market can cause big issues within and cause a big decline on its shares or market which was the case of a lot of Banks in the financial crisis of 2007-2008. I´ve personally learned a lot, ,since risk is a factor everyone takes into account from personal risks to big corporate risks, but never had a glance at how risk was divided and could affect so much a company in a big manner so fast if they're not ready for the strike of it.
LUIS ANTONIO GUTIERREZ VILLAFRANCE 1602491 CONCLUSION In this Project, I learn how to measure the financial risk such as the market risk, operational risk, systemic risk and other ones. The market risk is a special risk because of its importance on the real life of the enterprises. This indicator measure how many risk has an enterprise in order to survive on the market. The operational risk is a good indicator which can help you to know which errors can happen on the manufacture or the application of one service or product in the market or in the same business. By the way, on the part of Financial Ratio Analysis, we learn how to apply the concepts in the real life. For example, in the case of Navistar, I learn that this enterprise has a lot of debt which is a bad sign to the company but, it has just the assets to cover its own debt excluding the inventory. In the case of AT&T, is another thing, the company is a leveraged one and it is functioning in a weird way at the moment. The operational risk with this company can be the low sale of products because of the macroeconomic changes and the fluctuation of one currency in terms of another. F
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I learned on this project how to apply the Emma Score of Dun & Bradstreet and other metrics applying them into the real life. This help us to know if our enterprise on the future has risk to pay our debts in 12 months and which market environment will have on the future. This project is special because what matters the most is that you can learn the theory on one subject, but it is a different thing to apply it, with this project we apply our knowledge in order to be successful on the future.
ROSA NOHEMÍ PÉREZ GONZÁLEZ 1559186
CONCLUSION It is well known that a little mistake on the financial area could be the worst thing that could happen in the company, due to several reasons, but the most important: the loose of money. That’s why while doing this magazine as a team it is perceived about the cases or news about each topic related to Risk Management is such an interesting thing that a subject that is not partially liked or loved by everyone could but it brings people and companies the necessary information to complement the analysis of a company to pursue an investment in short or long term I really enjoy doing it because it allows us as students the opportunity to see how these concepts function in real life and the way the users solve any trouble on the road and establish a good base for the future, learning from the mistakes, personally I think not only the company but the person itself should pursue that, as the CEO or the owner is the main root of the company, it is imperative to learn from the mistakes and do everything good and on time The subject, Risk Management is an important side of the coin that allow the owner and employees to act properly towards problems. For this project, it was really productive because people gather real information in real life and try to understand what we learned while doing it with the chapters. People can take risks and it’s inevitable that they will do it, the difference between all of those people who are taking the risks, are the ones that are conscious about how the risk could imply on business; those are going to be sure what will happen and act properly according to it so their losses, if they even exist, would be reduced.
REFERENCES By adopting an integrated operational risk framework, companies can ensure that all operational risks management initiatives are sustained and are aligned with the corporate strategy. Next section throws light on essentials of an ideal operational risk framework. (n.d.). Operational Risk Management (ORM) Framework in Banks and Financial Institutions. Retrieved from http://www.metricstream.com/ solution_briefs/ORM.htm Case Studies. (n.d.). Retrieved from http://www.prmia.org/risk-resources/case-studies Company, B. (n.d.). Credit risk management: What it is and why it matters. Retrieved October 26, 2016, from http://www.sas.com/en_my/insights/risk-fraud/credit-risk-management.html Dun & Bradstreet. (n.d.) Retrieved from: http://www.dnb.com/solutions/finance-and-risk-management. html Financial Institution Risk Management Issues - aig.com. (n.d.). Retrieved from http://www.aig.com/ content/dam/aig/america-canada/us/documents/business/industry/financial-institution-risk-management-issues-2014-01-13-brochure.pdf Moody’s. (n.d.). Retrieved from: https://www.moodys.com/Pages/amr002002.aspx P. (n.d.). Managing Risks in Financial Services: Case Study. Retrieved, from http://www.pwc.lu/en/ risk-management/case-operational-risk.html Miranda, B. L. (n.d.). Journal Of Credit Risk - A Risk Journal. Retrieved, from http://www.risk.net/type/ journal/source/journal-of-credit-risk PAYDEX Score: The Dun & Bradstreet Business Credit Rating. (n.d.). Retrieved from https://www.nav. com/business-credit-scores/dun-bradstreet-paydex/ Predictive Global Payment Risk - D&B Emerging Market ... (n.d.). Retrieved from https://developer. dnb.com/docs/2.0/assessment/3.0/emma Recent Developments. (n.d.). Retrieved from http://www.federalreserve.gov/ S&P Global Ratings. Standard & Poor’s. Retrieved from: https://www.standardandpoors.com/en_AU/ web/guest/article/-/view/sourceId/504352 The, B. M. (n.d.). CREDIT & FINANCE RISK ANALYSIS. Retrieved, from http://credfinrisk.com/basics.html