Risk Silo

From Open Risk Manual

Definition

Risk Silo is an informal (usually meant as derogatory) characterisation ascribed to organizational structures of Risk Management. It is meant to indicate that the treatment of the range of various possible risks in done in isolation (autonomously) rather than in an integrated way. Risk silos can happen within any type and at any level of an organization.

Context

In itself, the silo structure is simply a description of structure. It is typically invoked in the context of Risk Management Failure: incidents where risks are seen (ex-post) as having been managed in suboptimal ways.

Causes

Risk Silos may emerge for a variety of reasons, reflecting the diverse nature of risks and risk management concepts. A common cause is the segmentation along distinct technical specializations with diverging conventions, working styles and tools. Such segmentation might created by practical requirements to optimize operations (e.g. distinct risk committees)

An indicative list of further factors that may be relevant depending on the organizations context:

  • Due to internal business unit segmentation / company politics
  • Following external (market) segmentation, e.g., in terms of client base or product type
  • Segmentation along cultural / linguistic barriers
  • Due to Information Silos
  • As outcome of regulatory structures (internal structures reflecting regulatory structures)
  • Intrinsic difficulty to unify risk views in workable frameworks

Manifestation

  • Limited or no information exchange
  • Diverging interpretations of similar information (lack of a common language for risk)
  • Uncoordinated Risk Mitigation actions

Mitigation

More elaborate risk management organizational frameworks going under the names Enterprise Wide Risk Management, Integrated Risk Management, or Holistic Risk Management have emerged as approaches to address Risk Silo vulnerabilities (but enjoy variable degrees of adoption / success). Typical elements of such frameworks are

  • Adjusted organizational structure that promotes internal information flow
  • Augmenting management frameworks to address blind spots
  • Instituting a common language for risk

Risk Silos in Banking

In the banking industry risk silos emerge around the various axes:

  • Market segmentation (e.g. Traded Credit Markets versus Commercial Banking activities) where similar risks are embedded and treated in different ways
  • Regulatory reporting segmentation (Credit, Market, Operational Risk) where internal risk management structures align primarily to regulatory requirements rather than intrinsic relations of risks
  • Internal Risk Management units versus Finance / Accounting units

Issues and Challenges

  • At its simplest form, the risk silo phenomemon may hinder efforts for Risk Aggregation, that is collecting and compiling a complete overview of exposure to certain risks
  • The existence of more complex, e.g., interacting, risk phenomena means that a segmentation of risk management activities may potentially create blind spots for second order risks.

See Also


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