Risk Management for Recruiters
Definitions of Key Terms
Market Risk
Credit Risk
Operational Risk
Enterprise Risk
Risk Management for Recruiters
What is Risk Management
Risk Management is broad discipline both within as well as outside of financial services. In summary, risk management involves defining and addressing the risks that currently impact and/or could potentially impact a business. These risks can be addressed in many ways including insurance, hedging, processes, technology, and people.
The risk function in a firm typically reports up to a Chief Risk Officer, who reports to the CEO, but in many organizations the reporting structure differs. Risk can report to the CFO, to the General Counsel, and even directly to the Board of Directors. The most common structure has risk reporting up to someone in the organization, usually a CEO, and almost always outside of a revenue-generating role. For instance, risk reporting to sales or to trading or even to the Chief Investment Officer significantly reduces the efficacy and independence of the role.
These terms are being defined below for recruiters and human resource professionals. While the definitions are accurate, they are meant to assist the recruiters in doing their job in sourcing and evaluating risk talent and not for risk professionals. Risk professionals should seek more detailed descriptions which can be found at www.prmia.org and www.garp.org/.
1) market risk – the risk that pricing in sthe financial markets will move against your position. A simple example is United Airlines and the price of oil. The price of oil is a market risk to United Airlines. United has little to no control over the price of oil. When its price moves up and down, this can significantly impact the profitability and even the viability of United Airlines because they rely on jet fuel, an oil product, to run their business.
2) Credit risk – the risk that your financial partner will be unable to pay you back at the time funds are due. An example would be JP Morgan creating a $50 million bank line of credit for Starbucks. Credit risk is the risk that when the note is due, Starbucks would lack either liquidity or collateral to pay back the line balance. Another example is called counterparty credit risk. That credit risk involves the risk that the financial trading partner, maybe a bank or a hedge fund, is unable to complete a financial transaction such as an interest rate swap, due again to lack of liquidity or lack of collateral.
3) Operational risk – the risk that operations, involving people, processes and technology will adversely impact your firm. These risks include fraud, errors, technology glitches, reputation, regulatory, etc. It is somewhat of a catch-all for risks that are not market or credit risks. Basel I, II III are international banking regulations that require mostly banks to set aside capital for these risks. Calculating these measurements is important, as capital set aside to cover potential operational losses cannot be deployed for other, more profitable, pursuits.
4) Enterprise risk – this is the combination and inter-relationship of the three primary risks above. Pulling it all together is important. A simple example would be that, as shown above, the price of oil, a market risk, can impact United Airlines ability to pay back a bank loan, a credit risk. Or, software systems and their potential trading errors, can impact reputational risk if clients rely on this software to run their businesses. Most firms, including healthcare and insurance firms, are taking a hard look at enterprise risk.
For more information, please contact me at mwoodrow@risktalent.com