Financial risk management refers to the process by which companies identify potential risks with respect to its finances, analyze them and draw up precautionary measures and strategies to avert or minimize such risks. It is essential in banks, non-banking financial institutions and corporate houses. A financial risk manager is a certified professional who has expertise in market, investment, credit and operational risks that companies may face and tools for their effective management. FRMs are important people in an organization with their unique skill set and knowledge.
What does a Financial Risk Manager Do?
Design risk management process: The most important function of a Financial Risk Manager is the designing of a comprehensive risk management process, procedures and policies of an organization. They also plan and execute strategies for risk management.
Methodology for risk identification, assessment and analysis: The FRM identifies potential financial risks facing the organization and analyzes the possible impacts. For this purpose, they draft a clear and holistic methodology for risk identification, assessment and analysis. The assessment and analysis should be able to show the depth and magnitude of risks as well as estimate the costs for the organization. The FRM may choose to develop software/ computer programs or use statistical methods for assessment.
Risk evaluation and budgeting: The intensity and magnitude of the risk needs to be evaluated and based on the organization’s risk management policies, certain guidelines for minimizing/ averting risks or easing the impact it creates and legal & relevant authorities’ guidelines will have to be followed in terms of insurance, costs, legal requirements, environmental regulations and so on. These elements must be carefully budgeted. The organization’s previous handling of risks will also have to evaluated and taken into cognizance. The FRM does all of this.
Establish risk appetite: The FRM is responsible for establishing the level of risk the organization is willing to and prepared to take; establishing an organization’s risk appetite.
Contingency plans and precautionary measures: The FRM puts in place sound contingency plans and precautionary measures based on assessments and evaluation of the risks both internal and external (global, national, local). They plan and purchase insurance, put together health and safety measures, and prepare business continuity plans with a focus on minimizing business risk.
Risk reporting and record maintenance: The Financial Risk Manager prepares customized reports regarding various aspects of risks including assessment of depth and magnitude, nature, probable consequences, budgeting, costs, insurance, etc. based on the needs of different groups of stakeholders. They maintain records of insurance policies, risk experiences, claims and loss experiences.
Review: Being specialists in financial risk, FRMs play a major role in the review of legal documents, contracts, policies, new activities and programs, etc. They examine these to find the scope of losses, insurance and other financial implications.
Proposal development: They aid in the preparation of proposals with their skills in forecasting trends and risks involved, and accordingly accommodating these in the proposal.
Financial risk management course and certifications equip individuals with all the knowledge, skills and tools to become a Financial Risk Manager.