Risk management in emerging markets | mustafakhalaf

In the process of internationalizing, companies should take care about their new framework of risk management, especially if the process of internationalizing is towards emerging markets. After crisis, companies should make their pricing process depending on their risk taken, and build a risk-incentive system.

First of all, the financial institutions have to define their types of risk and their risk appetite. This should be done by a risk appetite framework that takes into account the risk principles, strategic principles, governing financial objectives and some measures to rule and control the risk appetite. This framework should match the risky activities with the expectations of the shareholders? and to emphasize the institution?s risk management strong culture in a transparent procedures that allows everybody to be updated with the latest data and emphasizing the transparency in the framework of the risk appetite.

One of the most important points that all the firms should understand is their risk exposures, which may result in losses in their investments. Also, firms should take into account the periods of their risk exposure, especially with the OTC exposure and should ask for more collateral from their brokers to protect against default, and contentiously monitor their exposure to counterparties. As a result, risk governance should be a top priority and enters the strategic view for the senior management of any business.

Financial institutions should run a rigid credit analysis of counterparties. New divisions have to be created for structural credit positions and to monitor credit quality. Some emphasis should be applied on the abilities and quality of forecasting the future in all of the cases which include the worst case scenario.

Institutions have to understand the relation between credit risk and each type of risk represented in the Enterprise wide Risk Management system. Some models already exist for this integration starting from: Credit portfolio Models, when institutions have their internal credit models for risk management where thy differentiate risk on certain parameters. Internal Ratings: where ratings are given for the creditworthiness of an entity which reflects its ability to repay debt. Exposure limit: where institutions create a scale for exposure to a certain number of entities and categories, so that if the exposure hit the limit, trade with the entity will be blocked. Stress testing: is done to overcome some drawbacks of risk models that depend on historical data.

To help in managing the credit risk especially in crisis there are some recommended ways to follow: Risk base pricing, Covenants of the capital of the debtor, Credit insurance for receivables, Credit derivative to hedge the risks and Collaterals.

The framework for the credit risk should focus on the culture of the institution, the people and the organization with the emphasis on the importance of the technology in the recent days, IT systems, so that companies could enhance their forecasting to make the best decision. The framework should include in the core: Risk rating systems-e.g. RARAOC, business process improvements, data management using IT systems to deal with data and risk intelligence such as dashboards.

After building the framework, financial institutions should run credit risk assessments, and build a reporting dashboard system for the Enterprise wide Risk Management and after that they should start forecasting the future depending on the general situation, but more conservative decisions and approaches should be taken in crisis times.?

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