Kaplan And Mike Risk Management Framework

Prior to the international financial crisis (2008), many international banks used a rules based approach to risk management. The failure of this approach to anticipate the affects of the financial crisis has mandated an increase on the focus of risk management since then.

The rationale for Kaplan & Mikes risk management framework is that a rules based approach to risk management is not appropriate or sufficient to manage all the risks that an organisation may face. This essay sets out to explain the framework set out by Kaplan & Mikes.

Furthermore, an evaluation of how this framework can be applied to banks management of market and operational risk is relevant considering the affects of realised operational and market risks from the financial
These risks can be very difficult if not impossible to predict. The focus for a company in managing these types of risks is to ensure adverse affects can be offset by mitigating planned actions.

Difficulties in managing risk

Before going into how strategy and external risks can be managed, Kaplan & Mike's explain some of the impediments to risk management. Their framework is chiefly centred on how strategic and external risks can be managed and they address what this author believes is a key concern of the article prior to detailing the proposed framework: that risk is very difficult for individuals and isolated groups to manage within a company i.e. discussion of risk is key.

These difficulties are highlighted when the article refers to negative factors that can affect an individual's perception of risk. These are referred to as “cognitive biases”.

Kaplan & Mikes focus on how these cognitive biases can be overcome through building the discussion of risk within a company.
Groupthink is a phenomenon that occurs within a group of people, in which the desire for harmony or conformity in the group results in an irrational or dysfunctional decision-making outcome.

Groupthink was identified as one of the behaviours attributable to Irish Financial institutions prior to the financial crisis and a primary failure in risk giving rise to the systemic banking crisis in Ireland. This is a difficult bias to overcome as the notion of corroboration is rooted in our intellectual habits and discourse .

Compartmentalisation is another bias raised in the article. This is labelling risks into particular categories which can discourage discussion of risk e.g. a risk can be labelled an information risk and assigned exclusively to an information management function of a company. This could lead to a lack of discussion about the risk and accordingly a failure to identify its likelihood.

Managing