Conventional Risk Management Models

risk management

Given the central role of effective, firmwide risk management in maintaining strong financial institutions, it is clear that supervisors must redouble their efforts to help organizations improve their risk-management practices…

We are also considering the need for additional or revised supervisory guidance regarding various aspects of risk management, including a further emphasis on the need for an enterprise-wide perspective when assessing risk.

For those organizations that choose to weather this economic storm with the aid of ERM, the benefits of their efforts today will likely remain long thereafter.”

Grant Thornton

Risk management in any business enterprise is an essential aspect of running a successful business system that integrates varying levels of control regarding managing risk.

Sometimes companies anticipate possible risks and assess the potential impact on the company’s future business and get prepared with a plan to meet the challenges of financial risks that may come up at any time.

These risks stem from various sources, including financial uncertainties, legal liabilities, technology issues, strategic management errors, accidents, or catastrophes.

The investors face the market risk that involves changing conditions in the specific marketplace in which a company competes for business, such as the increasing tendency of consumers to shop online.

Credit risk refers to businesses’ risk by extending credit to the customers. Businesses take a financial risk when they provide financing of purchases to their customers.

However, some companies fail to handle their credit obligations and cannot pay the clients the sufficient cash flow required.

Finance companies may face liquidity risks. It involves asset liquidity and operational funding liquidity risk. Sometimes, the company needs sudden, substantial additional cash flow to pay necessary business expenses.

Therefore, managing cash flow is critical to business. Operational risks arise from a company’s ordinary business activities. The operational risk category includes lawsuits, fraud risk, or personnel problems.

Risk Management Framework by Katina Stefanova:


Katina Stefanova is the founder of Marto Capital, multi-strategy asset management and advisory firm focused on optimal asset allocation.

Her services include investing in disruptive asset management companies, enabling them to monitor their profit curve and value chain.

Companies need to manage risk by identifying, measuring, and monitoring the key issues causing risk.

To manage market risk, the business model of Stefanova emphasizes the firms follow crucial components of the risk management framework.

First, the companies need to identify the possible risks a company faces, such as IT, operational, regulatory, legal, political, strategic, and credit risks.

Risk measurement provides information about specific risk exposure. When firms measure specific risk exposure, they learn that risk measurement also affects the organization’s overall risk profile.

Once the company has measured its risks, it can decide which risks to eliminate or minimize and how much of its core risks to retain.

Furthermore, the framework implies that the firms regularly report on specific and aggregate risk measures to ensure that risk levels remain optimal.

Financial institutions need to produce daily risk reports to avoid future risks.

Stefanova suggests that asset management firms implement risk governance that will improve efficiency and bring transparency to work to let the employees perform their duties per the risk management framework.

According to her, both retail and institutional investors who unable to survive the economic recessions solely because the investors oversee various aspects of the company’s assets risk. It involves sheer negligence from the investors to disaggregate or completely miss the operational risk.

Another reason that causes mishandling of assets in a financial company is the regulators that potentially look at the problems that have already manifested than proactively identify new risks that could cause the next business failure.

She asserts that asset managers do not require any balance sheet since they do not own the asset.

However, they should have a comprehensive overview of the key problems that cause risk.

Mismanagement caused financial risk, and their investment processes led to an unexpected external and internal risk to the company.

The framework suggested by Stefanova involves the firms defining the roles of all employees, segregating duties, and assigning authority to individuals and committees to analyze core risks.

The framework allows the firms to know which risks are worth taking, which ones will get us to our goal. This establishes the fact that risk management is intertwined with organizational strategy.

Risk management leaders should define the organization’s risk appetite to link them – i.e., the amount of risk it is willing to accept to realize its objectives.

According to Phillipa Girling, a leading expert on operational risk, the author states that operational risk in the headlines in the past few years is hard to ignore.

For instance, inefficiently managed operational risk costs investors, corporations, and taxpayers billions of dollars.

For example, Madoff’s pyramid reportedly cost investors $18 billion, and the 2008 government bailout cost taxpayers $700 billion. (New York Times Archives).

Initiatives by Katina Stefanova to Make Safe and Secure Investments

Stefanova has served as a management committee advisor at Bridgewater Associates, the largest hedge fund in the financial industry. She held both investment and management leadership roles.

She helped startups and successful businesses develop investment plans that help the firms avoid disruption in investment and increase awareness of risk across the organization.

In addition, the risk and compliance strategies of Stefanova have helped to improve operational efficiency by applying more consistent applications of risk processes and control.

Risk can be addressed by finding methods to reduce either the severity of the loss or the likelihood of the loss occurring.”

The asset managers should demonstrate commitment to operational risk management. Some asset managers understand and are willing to invest in operational risk management.

For instance, Citadel and Tudor investors invested in a custom-built straight-through processing system that integrates the trading platforms with the post-trade processes.

This strategy helps to create greater transparency and reliability. In addition, it helps to commercialize technologies and make these available to smaller money managers who may not be able to afford a large in-house technology development team.

Stefanova suggests firms look for business partners that can help the firms to assess potential gaps to avoid risks in the future.

Facilitation with new business partners helps firms create an innovative risk model that holistically approaches risk.

The model should identify trends that excel in the traditional market, credit, and operational risk framework.

Implementing this model will enable the firms to adopt strategic risks that help to improve customer relations and boost technical innovations.

According to Stefanova, investors need to raise due-diligence standards to demand greater transparency and accountability from money managers.

They can conduct comprehensive due diligence into the operational risk of their portfolio by asking questions from consultants, current and former employees concerning the reliability and scalability of their technology infrastructure.

This helps the firms to analyze how they can withstand market volatility.

To avoid risks in the future, asset management firms can refrain from activities that carry unacceptable risks. For example, while setting up a company in a foreign location, the business owners should know about environmental damage associated with the site.

Conversely, they should look for the areas that help grow their business. Asset management firms should make organizational charts that help the company keep checks and balances.

By assessing the chart, the companies can look for signs of conflict of interest and reflect on the areas that are overlooked that cause serious risk.

Businesses should adopt a risk retention approach. Organizations can choose to accept certain risks and any losses that may arise. This includes analyzing risks that are so large that they are not insured and cannot be avoided.

Therefore, the risk acceptance strategy allows companies to cope with the consequences of the incident happens. In addition, they help reduce the risk of the effects by taking measures to eliminate its cause and reduce the risk-taking place in the future.

With the help of these strategies, Marto Capital has been able to identify the potential risks and control threats to its capital and assets.

The risk management model helped Marto Capital to consider the full range of risks it could face. Implementing the risk model allowed the investors at Marto capital to gain lucrative investment opportunities, benefiting both the organization and the clients.

All the assets at Marto Capital get maximum exposure to calculated risks and help to increase its business value in the global world of investment.

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