Over the last 15 to 20 years, risk management has gained importance for companies in the financial sector and has gradually been positioned closer to business activities. This is mainly due to two factors: the growing complexity of financial markets and the introduction of more and more complex regulation of financial firms. Solvency 2, Basel III and the newly introduced rules for banking crisis management are some examples of the new regulatory responses to the financial crisis of 2009. The most effective financial companies integrate risk management as a tool in their day-to-day operations.
“The financial industry is more complicated, with more requirements and regulations today than 15–20 years ago. Expectations are higher for companies and executive management to understand and integrate risk management into both their long-term strategy and their day-to-day operations,” says Bo Becker, professor of financial economics at the Stockholm School of Economics.
A new program for risk management
Becker heads SSE Executive Education’s new program for executives in the financial sector who want to develop their ability to manage risk and make risk management a part of their business. The program is delivered in close cooperation with WHU – the Otto Beisheim School of Management in Germany – with participants from across Europe.
“The challenges increasingly faced by financial companies, and which this program is designed to meet, are about how to integrate risk management into the business. More and more people are risk management users or producers of input to risk management. This increases the requirements on processes and structures that efficiently integrate various types of risks and that continuously give the right people the right information. Additionally, the systems must meet all major legal and regulatory requirements.”
Different factors affect risk management
An important part of risk management is understanding your company’s specific needs and exposure. Operational, commercial and financial risks must be understood together.
“A recurring problem is having reasonable limits at a high level but not having designed the system right. It’s possible that risk management is not integrated correctly at the company or that there are employee incentives that are counterproductive to its own risk management,” says Michael Halling, researcher in financial economics at the Stockholm School of Economics and an expert on risk management.
Value-adding tools and techniques
Halling sees risk management as an important tool for companies and their executive teams.
“I believe that a properly functioning process for risk management creates value because it means that management better selects projects and can better identify value-creating activities, as well as potential threats to profitability and survival. Risk management aims to reduce uncertainty, and more specifically to limit fluctuations in profit levels. Such a decrease can facilitate business decisions as well as financing.”
Companies that fail to effectively manage risk can often be hit hard. The negative impact of unforeseen situations is not only about direct costs, but means a long-term impact on the company’s reputation and brand.
“Just look at Volkswagen right now, BP a few years ago, or the banks that were involved in mortgage-backed securities in the United States. BP, for example, had several previous cases of accidents like the large explosion on the Deepwater Horizon oil rig in April 2010. In hindsight, the risk management methods within the company appear inadequate. Reports from several regulatory agencies showed that the corporate culture at BP at the time lacked adequate support for risk management. Communication methods for addressing potential risks were weak, worst-case scenarios for accidents like oil rig explosions were not in place and management in general seemed unaware of ‘black swan’ events.”
Risk management helps business development
Implementing risk management in financial firms is a continuous challenge. Strict limitations and bureaucratic processes should not stifle innovation and efficiency.
“This is all about implementing the risk management function so that you get all the desirable components but do not become too bureaucratic and choke off the company’s competitiveness. Companies have to deal with the requirements from new regulations and financial markets, but it must not happen at the expense of business development,” says Becker.
Find out more about how SSE Executive Education can help your organization develop.
SSE Executive Education is Northern Europe’s leading hub for executive education and has been ranked 1st by the Financial Times for 15 consecutive years. We develop leaders by blending academic research and practical business application. Our objective is to strengthen Swedish competitiveness with a focus on pioneering disciplines like innovation, entrepreneurship, sustainability and finance.
SSE Executive Education is a wholly owned subsidiary of the Stockholm School of Economics. Each year, 5,000 leaders and specialists from across the world develop their skills through one of the open, customized or consortium programs we offer. These programs, based on knowledge flows, have been developed in close cooperation with the Swedish business community and experts at the Stockholm School of Economics to provide leaders with the tools they need to implement visionary ideas that drive change throughout their organizations.
This spring, SSE Executive Education will be starting a completely new, customized risk management program for controllers in the public sector. Read more about the program here.
Bo Becker is a professor at the Department of Financial Economics at the Stockholm School of Economics. Professor Becker holds an M.Sc. from the Stockholm School of Economics and a Ph.D. from the University of Chicago. He has previously taught in the United States at the University of Illinois and Harvard Business School. He serves on the board of the Swedish National Debt Office. At SSE Executive Education, Professor Becker is head instructor in corporate finance at the diploma program for financial analysts.
Michael Halling is an associate professor of financial economics at the Stockholm School of Economics and holds a research position at the Swedish House of Finance. He has a Ph.D. in finance from the University of Vienna. His work has been published in leading journals such as the Journal of Finance, The Review of Financial Studies, The Journal of Financial Economics and The Journal of Financial and Quantitative Analysis. Together with Bo Becker, Michael Halling is faculty and program director for the recently launched international risk management program at SSE Executive Education.
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