Financial Risk Manager Part 1
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Which of the following observations correctly describes the fundamental differences between Enterprise Risk Management (ERM) and a traditional silo-based risk management program?
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TTanishq
A
ERM approach reduces the overall risks to the enterprise by focusing primarily on operational risks while a silo-based approach often overlooks operational risks due to its focus on individual business units.
B
ERM approach identifies, monitors, and manages all types of risks in an integrated manner, while a silo-based approach manages risks in isolation.
C
ERM approach tends to increase risk exposure due to its broad focus, while a silo-based approach decreases risk exposure through focused, individualized risk
Explanation:
Explanation
Option B is correct because it accurately captures the fundamental difference between ERM and silo-based risk management:
Enterprise Risk Management (ERM):
- Takes a holistic, integrated approach to risk management
- Views risks across the entire organization as interconnected
- Manages all types of risks (strategic, operational, financial, compliance) together
- Considers risk correlations and interdependencies
Silo-based Risk Management:
- Manages risks within individual business units or departments
- Treats risks in isolation without considering cross-functional impacts
- May lead to suboptimal risk management decisions due to lack of coordination
- Can result in risk concentration or missed opportunities for risk diversification
Option A is incorrect because ERM does not focus primarily on operational risks - it covers all risk types comprehensively. Option C is incorrect because ERM's broad focus typically reduces, not increases, overall risk exposure through better coordination and diversification benefits.
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