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Why risk management fails

Risk modelling

Just like any other system, risk management is bound to fail if not properly manage (Cooper, Faseruk, & Khan, 2013). According to Chong (2003), risk modelling is one of the many factors that affect the performance of ERM in the banking sector. These are models and methods that are used in the evaluation of risk and performance measures that a bank wishes to use to gain more profits. A bank poses a simple financial model of all its operations and this model explains how various inputs are done. All the risk factors, conditions, strategies and tactics used by a bank are very crucial and if not well looked upon, they might affect the ERM performance within an enterprise (Yazid et al, 2011). If these factors are not well considered they might affect the performance indicators that are used in managing the banking sector. There are some structured financial models that are used within an enterprise to determine the expected outcome from given inputs (Zhao, Hwang & Pheng Low, 2014). However, they do not consider the probabilities of any outcome above or even below the expected value. This implies that such type of models will interfere with the performance of the ERM within an enterprise (Alviniussen & Jankensgård, 2009). There are many types of risks that can be applied in an organization and can be classified as methods that primarily rely on the availability of historical data, methods that primarily rely on expert input rather than historical data and finally methods that rely both on expert input and historical data.

Risk perception

The perception of risk also playes a role in determining the sucesse of ERM (Chen & Chen, 2012). In order for an ERM to be successful within an enterprise, there is a high need to have a risk-awareness culture that will ensure all risks taken by the management are well understood within their context. The culture in various organizations varies depending on the employees that are working in the sector and they all have to be informed on matters to do with partaking of risks. Enough resources have to be allocated by the management to give enough education to all workers on matters of safety risk management (Abrams, Müller, Pfitzmann & Ruschka-Taylor, 2007). Failure to which, they may perceive the risk wrongly and refuse to take relevant steps necessary to upscape the risk management. Lack of ensuring that the modelling culture is well followed leads to failure in then risk management within an enterprise.

Risk technology

This is another factor that affects the performance of ERM in the banking sector because; technology is very key in the implementation of a proper ERM-based system within an enterprise. There are several technology vendors in the market and a company needs to settle on the best in order to come with with a proper ERM. Through the use of technology, there is the provision of a timely data that can assist in analysis, identification, and response to risks. According to Chong (2003), all the changes brought through the use of technology help bank auditors to recognize and monitor all types of risk management. The more the nature of the risk changes, the more an enterprise needs to improve their technology in managing varios forms of risks created by technological advancements (Chadha et al, 1992). This is the reason as to why technology is very significant in managing risks that are rising on a daily basis in the banking sector. According to Cummins (2005), technology leads to a centralized system in the banking sector that guarantees an effective ERM-based approach that can ensure the smooth running of the banking activities. When technology is not well taken care of, it will lead to creation of risks with the potential of bringing the enterprise down.

References

Chadha, B., Masson, P. R., & Meredith, G. (1992). Models of inflation and the costs of disinflation. International Monetary Fund.Staff Papers – International Monetary Fund, 39(2), 395. Retrieved from http://search.proquest.com/docview/214766175?accountid=45049

Chen, J., & Chen, C. (2012). The study of contagious paces of financial crises. Quality and Quantity, 46(6), 1825-1846

Chong, Y. Y. (2003). How to achieve realistic risk management. Balance Sheet, 11(4), 44-64. Retrieved from http://search.proquest.com/docview/204698337?accountid=45049

Cooper, T., Faseruk, A., & Khan, S. (2013). Examining practitioner studies to explore ERM and organizational culture. Journal of Management Policy and Practice, 14(1), 53-68. Retrieved from http://search.proquest.com/docview/1429682635?accountid=45049

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