ERM - Is it top down approach OR horizontal orietantion?

[AbhishekJha]

Hi,

With respect to ERM , does it follow a "horizontal" orientation OR a "top down approach".

In Chapter 1 , Page # 6, it sounds like it follows both orientations as mentioned in the notes.

1. ERM has a top-down orientation or at least incorporates a top-down perspective: the board of directors defines a risk appetite and defines risk limits (for example), which may “cascade down” into the organization. In this way, business units (or divisions) are not isolated from the overall firm’s needs.

2. ERM morphs traditional tools into new tools. For example, VaR was developed for market risk, but under the ERM umbrella, VaR and economic capital are used to aggregate risk horizontally (e.g., across risk types) and vertically in the organization. As another example, scenario analysis is employed with software to illustrate more sophisticated multivariate macroeconomic scenarios.

 

[Lu Shu Kai FRM]

Hi @AbhishekJha ,

Thanks for your question. My experience with BT's questions is that this normally doesn't prove to be an issue because the questions tend to post a sensible answer with three other options that normally conflict (in the below case its one due to the requirement of the question) with ERM principles - the "horizontal" and "top-down" approach that you mentioned. For example,

- Identify hidden and/or dangerous concentrations including (for example) geographical, industry, product, or among supplier (top-down)
- Vertical vision recognizes potential threats to the whole enterprise ideally in their early stages to reduce the leverage effect of time (top-down)
- Thinking beyond silos acknowledges diversification among risk types and better understanding of how interactions might worsen enterprise threats (horizontal)

In summary, ERM is BOTH - "horizontal" and "top-down", whatever helps to make risk management more comprehensive and efficient, which is the main point (the main point part being my two cents).

Perhaps you can post a specific question - BT, GARP or Kaplan to let me better help you.

Hope this is helpful!

PS - amended. I just realised I this is a free resource where we can't post materials, so I have to take down the question.