Understanding Enterprise Risk Management

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Explain : Enterprise Risk Management

Enterprise risk management (ERM) is a methodology that looks at risk management strategically from the perspective of the entire firm or organization. It is a top-down strategy that aims to identify, assess, and prepare for potential losses, dangers, hazards, and other potentials for harm that may interfere with an organization's operations and objectives and/or lead to losses.


ERM takes a holistic approach and calls for management-level decision-making that may not necessarily make sense for an individual business unit or segment. Thus, instead of each business unit being responsible for its own risk management, firm-wide surveillance is given precedence. For instance, if a risk manager at an investment bank notices that two trading desks positioned in different areas of the firm have similar exposures to the same risk, they may force the lesser important of the two to eliminate that same position. This decision is made with the entire firm in mind (not with the specific trading desk).
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Management
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