Risk Frameworks
Last updated
Last updated
In traditional finance and other industries, several risk management frameworks and standards are widely recognized and used by organizations worldwide to identify, assess, manage, and mitigate risks.
COSO Enterprise Risk Management (ERM) Framework: The Committee of Sponsoring Organizations of the Treadway Commission (COSO) ERM Framework is a widely accepted framework for managing risk across an organization. It provides a structured and comprehensive approach to risk management, helping organizations manage risks and achieve their objectives.
ISO 31000: This is an international standard for risk management that provides principles, a framework, and a process for managing risk. It can be used by any organization regardless of its size, activity, or sector. ISO 31000 helps organizations increase the likelihood of achieving objectives, improve the identification of opportunities and threats, and effectively allocate and use resources for risk treatment. Used across industries.
Value at Risk (VaR): VaR is a statistical technique used to measure and quantify the level of financial risk within a firm or portfolio over a specific time frame. This measure is widely used by banks, securities firms, and corporate risk managers to gauge the potential loss in value of their positions due to market movements.
by Philippe Jorion
Stress Testing and Scenario Analysis: These are key components of risk management that involve simulating the impact of various extreme or unexpected events on an organization's financial position. Stress testing and scenario analysis help institutions understand vulnerabilities and prepare for adverse conditions.
- The IMF publishes in-depth reports on stress testing banks and financial systems across different risk scenarios. These provide great examples and methodologies.
- The EBA publishes stress testing methodologies, results, and guidelines, which are key resources for understanding how stress tests are conducted and interpreted in the European Union.
Operational Risk Management (ORM): ORM frameworks focus on identifying and mitigating risks arising from operational failures, such as systems failures, fraud, or other disruptions to business processes. The Basel Accords include specific requirements for managing operational risk.
- The Bank of International Settlements published foundational standards and guidelines for managing operational risk that are followed globally. This covers essential concepts.
Financial Risk Manager (FRM) Certification: While not a framework per se, the Global Association of Risk Professionals (GARP) offers the FRM certification, which is recognized as a leading credential for risk professionals. It covers critical areas of risk management, such as market risk, credit risk, operational risk, and risk management in investments, making it a comprehensive guide for professionals in the field.