Author: Allen Aravindan, CFA
Table of Contents
- What is risk management?
- Courses for Risk management careers
- Tools and Skills required in Risk management
- Jobs in risk management
Often people think that risk management is this sexy job, where I will be monitoring the graphs, isntructing people what they can or cant do. Well! To tell you the truth, its not exactly real.
Risk management Framework
- Risk Governance:This is the top management of any organisation, which sits and decides the risk budget. Whats acceptable risk and what is not. For eg. a risk governance team of a hedge fund might decide that we will not accept a standard deviation of more than 25% in the overall investments
- Risk Identification: This is where we decide the measurement metrics of risk. What is risk for you? It can be different for different kind of business’s. For eg in a bank risk might be liquidity, so we say liquidity risk
- Risk Infranstructure:These are the tools and softwares and systems to manage risk.
- Risk Policies:The limits to what can be done and what cannot.You see this is where the risk management policies get nailed.
- Risk Monutoring: Ways of monitoring the defined risk limits for eg in a bank you would keep checking on wether you are meeting the liquidity parameters or not.Also in this level you would also try to figure, what to do in case thre liquidity drops?
- Communication: These are pre defined channels of communication in case, we encounter risk limits that we cross. Who comes to know first, how they come to know and how fast.
Risk Management Process: Detailed overview and steps in the risk manaegemnet function
Risk Management Organisation Structure:
The risk management process also entails structuring the entire organisation for managing and implementing all the risk manageent policies.Below is a sample organisation strutucture of a large bank. Look at how the framework finally matches with the structure.
FRM ( GAARP)
A Financial Risk Manager (FRM) is an accreditation offered by the Global Association of Risk Professionals (GARP) that certifies the understanding of risk management concepts that are validated by international professional standards. This designation is recognized globally. Financial risk management is the process by which the economic value of a company is protected by using different financial mechanisms to reduce and mitigate risk exposure. To earn the FRM certification, the candidate must pass two exams and also work two years in the field of risk management.
Understanding the FRM program
The FRM curriculum covers the application of risk management tools and techniques to the investment management process. Professional who holds the FRM designation can participate in optional continued professional development. FRM program follows the major strategic disciplines of risk management such as market risk, credit risk, operational risk, liquidity risk, and investment management. The exam is recognized in over 90 countries and is designed to measure a financial risk manager’s ability to manage risk in a global environment. The questions are practical and related to real-world work experiences. Candidates are expected to understand risk management concepts and approaches as they would apply to a risk manager’s day-to-day activities.
Part 1 of the FRM exam is 100 questions that focus on the following four topics (weight as such):
- Foundations of risk management (20%)
- Quantitative analysis (20%)
- Financial markets and products (30%)
- Valuation and risk models (30%)
Part 2 of the exam consists of 80 questions from the following topics (weighted as follows):
- Market risk measurement and management (20%)
- Credit risk measurement and management (20%)
- Operational risk and resiliency (20%)
- Liquidity and treasury risk measurement and management (15%)
- Risk management and investment management (15%)
- Current issues in financial markets (10%)
By now you must have understood that a risk management role is not exactly as simple as we think. In terms of tools and skills that are required, let me be a little bit blank here.
- You need to know finance as a starter, you cant really understand risk management unless you understand finance.
- You need to learn statistics in depth- st dev, var, annova, simulations atleast an understanding on how to calculate in excel. Highly recommed to learning financialmodeling.
Thats all. I think after this the industry will teach you and guide you on your further advancements.
In 2018, the median salary for financial managers including FRMs was $127,990/year, according to the US. Bureau of Labor Statistics. FRMs are vastly employed in the financial services industry. According to the GARP, these are the top 10 companies employing the most FRMs:
- Bank of China
- Agricultural Bank of China
- Deutsche Bank
- Credit Suisse
Its definitely a good career option, if you like process and systems and like to be the one involved in monitoring work. Do not approach this field as a fancy, adrenalin pumping career and neither expect every day to be new too. If thats fine then go for it.=