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 rather than in an integrated way

Causes

  • (External) market segmentation
  • Technical specialization
  • Internal business unit segmentation / company politics

Risk Silos in Banking

In the banking industry risk silos emerge around the following principal 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

Issues and Challenges

  • At its simplest, risk silos 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.
  • More elaborate risk management organizational frameworks (Enterprise Wide Risk Management, Integrated Risk Management, Holistic Risk Management) have emerged as the means for addressing Risk Silo vulnerabilities but enjoy variable degrees of adoption / success

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