ACF308 Risk Management in International Banking,
Insurance and Finance 2018/19
Assignment 1 Guidance
- Ensure you read the assignment information sheet and that you understand the assessment criteria. These will be explained further in class.
- You must fulfil the assessment criteria to pass the assignment and the better you fulfil these criteria, the higher your mark will be. Pay attention to the wording and weightings for each criterion.
- A critical review requires much more than simply describing what LV does to manage risk. If you find yourself repeating large amounts of information from LV’s annual report and SFCR then you are being overly descriptive. For a critical review you must use the relevant academic literature to analyse the strengths and weaknesses of LV’s practice. ACF308 Risk Management in International Banking.
- Use only quality academic sources. It is strongly recommended that you use the sources recommended in class. If you use other sources and they are not high quality or not relevant then you will lose marks.
- Structure your work around the 3 assignment tasks. Start with any relevant theories and then apply this to LV’s risk management practice.
- Only complete the 3 tasks; do nothing else.
- No definitions or background is needed; this includes basic information about LV. If you include any unnecessary information like this you will lose marks and waste valuable words.
- Do not compare LV with any other organisation, you are using academic literature only as the means to review LV’s risk management activities. ACF308 Risk Management in International Banking.
- Spell and grammar check your work – there is no excuse for poor spelling or grammar when Word will check this automatically. Good (high scoring) work takes time and careful editing.
- Ensure that your reference list is in the Harvard style and is alphabetical (last name). ACF308 Risk Management in International Banking.
This should be around 50 words
Explain that you are investigating the value and effectiveness of LV’s risk management framework.
Explain that to achieve this you will be looking at the 3 question tasks only. ACF308 Risk Management in International Banking.
Include no background (including no background on LV) or definitions. Even a sentence or two of unnecessary material will lose marks.
The theoretical value of LV’s risk management activities
Around 700 words
Start with a brief explanation of why, in theory, risk management can add value to LV. There is no need to define value, but you should explain that the creation of value is linked to stakeholder satisfaction and ultimately a higher share price. The lecture on how risk management can add value will be useful here (during this lecture 3 key theoretical reasons for value are provided: stakeholder risk aversion; cash-flows/opportunities for growth and competition/comparative advantage in risk bearing). You must also read and cite a number of relevant and high quality sources. The following are particularly recommended:
V Aebi, G Sabato, & M Schmid (2012) “Risk Management, Corporate Governance, and Bank Performance in the Financial Crisis.” Journal of Banking & Finance Vol. 36, No. 12, pp3213-3226
S Bartram (2004) Corporate Risk Management as a Lever for Shareholder Value Creation, Financial Markets, Institutions & Instruments, Vol 9, No 5, 297-324. ACF308 Risk Management in International Banking.
C Smithson & B Simkins (2005) “Does Risk management Add Value? A Survey of the Evidence” Journal of Applied Corporate Finance, Vol 17, No. 3, pp8-17 (see also Chew, Ch. 11)
R Stulz (1996) “Rethinking Risk Management” Journal of Applied Corporate Finance, Vol 9, No. 3, pp8-25.
Apply this literature to LV. Look for evidence in the annual report of how risk management is adding value to LV. There is plenty of evidence you can use – examples will be highlighted in class, so be sure to attend. Be careful not to provide too much, quality is more important than quantity. ACF308 Risk Management in International Banking.
The effectiveness of LV’s enterprise risk management and risk appetite frameworks
About 700 words
You should not attempt to define risk management or what a risk management framework is. This would be too descriptive.
Rather you should start by explaining the elements of an effective (1) enterprise risk management framework (ERM) and (2) risk appetite framework, as identified within the relevant theoretical literature. This literature can then be used as the basis for your review of the effectiveness of LV’s ERM and risk appetite frameworks. ACF308 Risk Management in International Banking.
The lectures on risk appetite and ERM are essential to help you understand the key points to focus on within the theoretical literature, so be sure to attend these. Important considerations include:
- Whether LV consider risk as both a threat and an opportunity, including whether it views risk appetite in terms of a willingness to take, or simply a tolerance for risk
- Whether LV uses quantitative metrics and qualitative statements and indicators for risk appetite
- Whether LV use soft tools, such as risk culture, as well as harder risk management tools like risk policies and procedures (see material on Simon’s levers of control)
- Whether LV use different tools to assess and control different types of risk
You will find the following sources especially useful here:
S Ashby and S Diacon (2012) Understanding Enterprise Risk Appetite, Insurance ERM, 3rd August, http://www.insuranceerm.com/
P Bromiley, M McShane, A Nair and E Rustambekov (2015) “Enterprise Risk Management: Review, Critique, and Research Directions” Long Range Planning, Vol 48, pp 265-276
C Callahan and J Soileau (2017) “Does Enterprise Risk Management Enhance Operating Performance?” Advances in Accounting, Vol 37, pp122-139 (you can ignore sections 4 and 5)
CRO Forum (2013) Establishing and Embedding Risk Appetite: Practitioner’s View, Chief Risk Officer’s Forum, Amsterdam, www.croforum.com
COSO (2017) “Enterprise Risk Management: Integrating with Strategy and Performance” www.coso.org/Documents/2017-COSO-ERM-Integrating-with-Strategy-and-Performance-Executive-Summary.pdf
A Mikes and R Kaplan (2015) “When One Size Doesn’t Fit All: Evolving Directions in the Research and Practice of Enterprise Risk Management. Journal of Applied Corporate Finance, Vol. 27, No. 1, pp.37-40. Note: this is easier to read than most high quality academic papers, but not all of it is relevant. Select the key points using my lecture as a guide.
B Nocco and R Stultz (2006) “Enterprise Risk Management Theory and Practice”, Journal of Applied Corporate Finance, Vol 18, No 4, pp8-20. Note: this is an easy paper to read, but a little old. You might want to start with this source and then refer to the more recent sources. ACF308 Risk Management in International Banking.
You should then look for evidence in LV’s annual report and SFCR to examine whether or not they have effective ERM and risk appetite frameworks. Look for both positive and negative evidence. Possible evidence that you could use will be identified in the relevant classes. Use the ‘Find’ tool in Acrobat Reader to search for more.
Remember no description, only analysis.
Whether LV’s corporate governance arrangements adequately support their risk management activities
About 700 words
In the lecture on governance we will focus on one key theme: whether integrating risk management and corporate governance supports, or hinders, effective risk management. This is the issue that you should focus on here. ACF308 Risk Management in International Banking.
The academic literature on risk management has not looked at this issue in detail, as it is a new area of research. But you will find the recommended reading in the lecture on corporate governance helpful, as well as the lecture contents. See especially:
A Bhimani (2009) “Risk Management, Corporate Governance and Management Accounting: Emerging Interdependencies.” Management Accounting Research, Vol 20, No. 1, pp2-5
R Kaplan and A Mikes (2016) “Risk management – The Revealing Hand”. Journal of Applied Corporate Finance, Vol 28, No. 1, pp.8-18.
S Lundqvist (2015) “Why Firms Implement Risk Governance: Stepping Beyond Traditional Risk Management to Enterprise Risk Management” Journal of Accounting and Public Policy, Vol 34, pp 441-446
A key theme here is on the role of the risk function – does it act as an overseer, business partner or decision facilitator/consultant. Risk functions that operate as an overseer may ensure strong internal control, but lead to less effective strategic risk management decisions. See Kaplan and Mikes (2016) for a good discussion of this. ACF308 Risk Management in International Banking.
In this section look for evidence on how LV’s corporate governance arrangements (including the work of the second-line risk function) support, or hinder, its risk management activities. Possible evidence that you can use will be identified in the lecture on governance. ACF308 Risk Management in International Banking.
About 350 words
Provide a final answer to each of the three question elements, highlighting the key evidence you have to support your conclusion. Never say ‘I think’ and never provide an unsubstantiated opinion. Remember opinion counts for nothing without evidence (usually this evidence will be from LV’s annual report and SFCR and/or the relevant academic literature). ACF308 Risk Management in International Banking.
Use the above to sum up whether LV’s risk management activities are both effective and value adding.
Note that you should not provide any recommendations on how LV could improve – this is not part of the question. If you include any points that are not requested in the assignment brief you will lose marks. There is no hidden agenda to any of my assignment questions. Part of the assessment activity is looking at how well you can follow instruction – an important skills in business and especially risk management where mistakes can have serious consequences. ACF308 Risk Management in International Banking.
Spend time on writing a good conclusion – it will help you to get more structure marks. Paul Harington can provide advice on this if needed.