The Difference Between Enterprise Risk Management and Other Risks

In this video lesson, Richard Barr, explains the common misconception between Enterprise Risks and other types of risks such as operations risk and credit risk.

Here’s the transcription if you’d like to read this instead:

So today I want to talk to you a little bit about enterprise risk management.

But not just Enterprise Risk Management, also Operations Risk Management and Credit risk management. Or more to the point, the differences between these three. Generally people get these confused Risks overlay that are interconnected. And so people start to lose sight of what each of these particular fields is.

Enterprise Risk Management, one would think it’s all risk management because it’s the enterprise that you have to manage the risks for. The answer is no it’s not. Enterprise risk management is managing those risks which put the enterprise in jeopardy of failure.

Not all risks that you face will put the enterprise in danger of collapse. That’s where we look at the other risk types. Like Credit risk. Which of course deals with the liquidity and the credit worthiness of our counter-parties and our clients.

That’s one area now that may involve enterprise management if the potential loss is big enough to create the failure of the enterprise but not always.

The other one operations risk management is dealing with those risks that are on an operational level. Not all operational risks will lead to the collapse of your enterprise.

So, for instance if you have a banana peel in the central office and someone slips on the banana peel and breaks their leg when they fall down, that’s not going to create the collapse of your enterprise, it’s not going to create bankruptcy, it’s not going to create a huge enough loss that you probably even feel it, that’s where insurance of course comes in, a different topic entirely.

But that type of risk should be managed on an operational risk management level locally by the department by the office through the silo where that particular risk occurs. An enterprise risk is one that leads to the total collapse of the enterprise.

So if we were looking at, on an operational level things such as regulation areas such as: Where your entire building collapsing, your entire factory going out of business because of a physical hurricane or tsunami doing away with it. Those things will affect the survivability and sustainability of the organisation and that’s enterprise risk management.

Operations risk management we have it on a local level unless it’s going to impact the entire organization or the enterprise and in extreme adverse way.

Credit risk management’s best handled by those people who understand credit risk best. The portfolio managers and the credit officers except where those potential losses could create a loss for the organization. If we were to look the Subprime crisis which created the Recession of 2007-2008.

That would be a corporate governance issue. That would be a policy issue. And as such that might be an enterprise risk management issue as well. But the individual loans that made up the subprime, are not.

Those are a credit risk. Enterprise Risk Management (ERM) and are those risks which if they occur could lead to losses that affect the entire enterprise in a drastic and adverse way.

Credit risks, which affect the individual portfolio, and best left to those credit risk managers that are experts in that. And then of course the third and operations risk management which unless again it affects the entire enterprise in a major adverse way is best left to the operations risk managers at the Department, Division or Silo level.

Learn more about how to manage Enterprise Risks for your organization.