How to Evaluate Risk Management Units in Financial Institutions?

11 Pages Posted: 10 May 2018

See all articles by Michael Gelman

Michael Gelman

Alfred Lerner College of Business and Economics, The University of Delaware; Wharton School, University of Pennsylvania (visiting)

Doron Greenberg

Ariel University - Department of Economics and Business Administration

Mosi Rosenboim

Ben-Gurion University of the Negev

Date Written: Winter 2018

Abstract

Based on the existing Enterprise Risk Management framework and current government regulations, "banks are required to establish risk management units (RMUs) to review and evaluate their risks, monitor them, and to advise top management." Currently an integral part of the risk governance and management process, RMUs in financial institutions have become increasingly important since the 2007–2008 financial crisis. This article details the authors' creation of an index to evaluate the performance of risk management units in financial institutions, and then examines some of their findings. The index transforms twelve parameters into a simple and convenient index that isolates the RMU's activities from the rest of the organizational risk management process, its risk preferences and the activities of the rest of the units. The index's parameters are divided into three dimensions of the RMU's performance: professionalism, organizational status and relationship with top management and the board. The authors found a positive relationship between their RMUI and some important risk governance characteristics: CROs who are among the five highest paid executives at the bank, banks with at least one independent director serving on the board's risk committee having banking and finance experience and boards with greater efficacy.

Suggested Citation

Gelman, Michael and Greenberg, Doron and Rosenboim, Mosi, How to Evaluate Risk Management Units in Financial Institutions? (Winter 2018). Journal of Applied Corporate Finance, Vol. 30, Issue 1, pp. 89-97, 2018, Available at SSRN: https://ssrn.com/abstract=3176253 or http://dx.doi.org/10.1111/jacf.12281

Michael Gelman (Contact Author)

Alfred Lerner College of Business and Economics, The University of Delaware; Wharton School, University of Pennsylvania (visiting) ( email )

20 Orchard Rd
United States

Doron Greenberg

Ariel University - Department of Economics and Business Administration ( email )

Israel

Mosi Rosenboim

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheva, 84105
Israel

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