Holistic risk management

From Open Risk Manual

Definition

Holistic risk management (also integrated risk management) is a set of organizational principles and practices defining a certain manner of organizing firm wide risk management activities. The core concept focuses on the avoidance of so called "risk silos", namely the presence of disconnected functions and processes whose scope is limited to some particular aspect of risk, segmented by business lines or other internal firm demarcations.

Elements of the holistic approach

The holistic approach has gained traction mostly as a means to address some of the weaknesses of silo based risk management which tends to organize risk management activities around parallel lines (e.g. credit risk function and processes versus market risk, operational risk etc.)

The main elements of a holistic approach are:

  • Organizational structure (staffing) that facilitates managing across risk silos
  • Management framework and policies that cover all firm activities and cross notional barriers
  • An analytic and measurement framework that considers the firm in its entirety

Issues and Challenges

Holistic risk management tends to remain an aspirational target for many risk management organizations for a number of persistent reasons:

  • Internal business arrangements and/or frictions prevent meaningful integrated risk management. I.e., business lines are essentially distinct corporate units
  • Staff specialization per risk type that hinders "holistic" understanding. The outcome of specialization is that (per business line) there tends to be a "dominant" risk function that is the one closest aligned with the technicalities of the particular business (e.g. market risk for trading operations, credit risk for lending businesses etc)
  • Immature state of measurement frameworks vis-a-vis "inter-risk" interactions or correlations. This state of affairs is both a consequence of the previous two reasons and the increasing difficulty of meaningful risk analysis across ever more complicated domains

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