Risk Manager – Job Description

This article written by Akshit Gupta (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the job description of a Risk Manager.

Introduction

Ever since the financial crisis of 2008, new rules and regulations have been put into place by different regulatory authorities across the world. These rules and regulations demand strict monitoring of a financial institution’s risk exposure and compliance with them. They have emphasized the practice of risk management in almost all the financial institutions and companies across the world.

Risk management practices involve setting up policies and procedures in place to assess, analyze, control, and manage different risks that an institution is exposed to.

Within the scope of finance, a risk manager is responsible to control and manage the risks arising from different financial activities that a financial institution undertakes. The risk manager does his/her job by setting up policies and procedures to analyze and mitigate the risk inherent in these day-to-day activities. Different banks and institutions have specifics models in place to monitor and quantify their risk exposure.

Types of risk managers

To analyze and mitigate the risk present across the organization, risk managers are appointed across different departments and their field of expertise includes the following categories:

Credit risk manager

The job of a credit risk manager involves analyzing and mitigating the risk arising from,

default on different loans a bank has given to its clients (total credit exposure)
Or, counterparty risk which may arise if the other party to the investment or trading transaction (futures, options, or swaps) may not fulfil their obligation

The most important factor when working as a credit risk manager involves evaluating, controlling, and managing the risk of default by the clients to whom loans have been extended to or counterparties. A credit risk manager uses quantitative models to assess credit risk. For retail customers, credit risk is often assessed with scoring methods. For the securities issued by firms (commercial paper and bonds for example), credit rating agencies also play a major role in assigning ratings based on the counterparty’s financial conditions.

Market risk manager

The job of a market risk manager involves analyzing and mitigating the risks of loss of an institution’s capital arising from its operations in financial markets. Banks, investment and trading firms have several portfolios comprising of financial instruments including stocks, bonds, derivatives, commodities, currencies, or interest rates. The performance of these instruments is monitored of a continuous basis. A market risk manager is responsible for monitoring the financial markets on a real time basis and implement appropriate measures to protect the institution’s capital. Different quantitative models like VaR and stress tests are used to analyze and control an institution’s exposure to market risk. (For example, in a trading firm, an market risk can arise from fluctuations in international commodity prices, interest rates, foreign exchange rates, or in equity shares that a firm trades in.)

Operational risk manager

The job of an operational risk manager involves analyzing and controlling the internal risk of an institutions arising from lack of rules and regulations or human errors. The risk can be due to human errors which can include corruption, internal frauds or malpractices followed by employees. (For example, a trader at an investment firm can take a trading position with leverage in excess to the approved amount. Such a position can put the firm in a difficult position if the market moves in an un-favorable direction leading to heavy losses to the firm.) An operational risk manager is responsible for setting up internal checks and controls to monitor an institution’s risk exposure related to its internal operations. He should ensure implementation and monitoring of procedures and methods by employees to ensure proper compliance to internal and external regulations.

(For example, a trader at an investment firm can take a trading position with leverage in excess to the approved amount. Such a position can put the firm in a difficult position if the market moves in an un-favorable direction leading to heavy losses to the firm.)

With whom does a risk manager work?

In a financial institution, the risk management departments are generally present in the middle office, overlooking the functioning of the back, middle and front office. The risk managers take inputs from the front office, which has the most significant trading activities and client interactions, to manage credit or market risks.

Since the job of a risk manager covers a wide area of activities, he/she works in coordination with different teams to ensure smooth functioning of an institution. (For example, the sales and trading team provides the risk managers with financial and transactional inputs which helps the risk managers to make statistical models and mitigate the counterparty or market risk arising from any transaction.) Some of the other most common teams a risk manager works with are:

Sales and trading team
Quants
Legal compliance
External regulatory bodies
Sector specialists and economists
Portfolio managers

How much does a risk manager earn?

The openings for the job of a risk manager have been increasing ever since the financial crisis of 2008. The remuneration of a risk manager depends on the type of role and organization he/she is working in. As of the writing of this article, an entry level risk manager working in a bank earns between €40,000–50,000 in the initial years of joining (source: Emolument).

As the analyst grows in experience, he/she earns an average salary of €70,000–80,000 including bonuses and extra benefits.

What training do you need to become a risk manager?

An individual working as a risk manager is expected to have a strong base in market finance and mathematics. He/she should be able to understand financial statements issued by firms (for credit risk) and statistical models (for market risk). As the risk manager talks to different employees, he/she should show strong interpersonal skills.

In France, a Grand Ecole diploma with a specialization in market finance is highly recommended to get an entry level risk manager position in a reputed bank or firm. The
Financial Risk Management (FRM) certification also provides a candidate with an edge over the other applicants while hunting for a job.

Useful resources

Efinancemanagement article: Introduction to financial risk

Relevance to the SimTrade course

The concepts about risk management can be learnt in the SimTrade Certificate:

About theory

By taking the Exchange orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.

By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.

About practice

By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.

By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants, and grasp the concept of market efficiency.

About the author

Article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Risk Manager – Job description