Chapter 4 - Enterprise Risk Management—A Paradigm Shift and Applications in Banking

Abstract

Banking is bedeviled by a myriad of risks. Classical literature adopts a silo view of the risks, ostensibly to underscore their individualities and wider significance for banking in their respective spheres. This compartmentalization perspective, on which banks in developing economies—like their counterparts elsewhere—have not fared well, is the crux of classical risk management method. Its main planks—focus on core assets, liabilities, and balance sheet—are scantily risk-based. While this perspective may serve some useful purpose, it leaves a big gap in methodology. The inevitable is a paradigm shift which enterprise risk management (ERM) symbolizes. I posit a holistic theme integrating all facets of composite risks. I define risk management best practice in banking. I discuss best practice inner workings. Then I pinpoint how risk management best practice should power the success of banks in developing economies. This ERM-approach marks a departure from the classical literature.