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  • Rory Roberts

Risk Identification and the three lines of defence

Risk Identification and the First Line of Defence

The risk identification process can interact with the front office in several ways:

I. Identifying risks related to front office activities: The risk identification process can identify risks that are specific to the front office, such as market and credit risks associated with trading and investment banking activities.

II. Providing risk information to front office staff: The risk identification process can provide risk information to front office staff, such as information about potential risks associated with specific transactions or clients. This can help front office staff to make informed decisions and manage risks effectively.

III. Incorporating front office input into risk assessments: The risk identification process can incorporate input from front office staff into risk assessments, such as their insights and expertise on specific risks or market conditions.

IV. Ensuring that front office activities are aligned with risk appetite: The risk identification process can help to ensure that front office activities are aligned with the organization's risk appetite, by identifying and assessing the risks associated with those activities and working with front office staff to implement controls to manage those risks


Risk Identification and Second Line of Defence

It can interact with existing risk management functions in several ways:

I. Providing information to risk management functions: The risk identification process can provide information to existing risk management functions, such as the risk management department or the board of directors. This information can include details about the risks that the organization is facing, as well as recommendations for managing those risks.

II. Supporting risk management activities: The risk identification process can support existing risk management functions by providing them with the information they need to make informed decisions about how to manage risks. This might include data on the likelihood and potential impact of identified risks, as well as information about the effectiveness of controls in place to manage those risks.

III. Aligning with risk management policies and procedures: The risk identification process should be aligned with the organization's risk management policies and procedures. This might include following established processes for identifying and assessing risks, as well as incorporating risk management considerations into decision-making processes.

IV. Collaborating with risk management functions: The risk identification process should work closely with existing risk management functions to ensure that risks are identified and managed effectively. This might involve regular communication and collaboration between the risk identification process and the risk management department or other risk management functions within the organization

V. Special note on operational Risk RCSA Process

Conflicts between a risk identification process and an existing RCSA (Risk and Control Self-Assessment) operational risk process can occur if the two processes are not properly aligned. To avoid conflicts between these processes, a bank can take the following steps:


a. Ensure that the risk identification process is integrated with the RCSA process: The risk identification process should be integrated with the RCSA process to ensure that risks are identified and assessed consistently across the organization. This might involve regularly updating the RCSA process with information from the risk identification process and vice versa.


b. Clearly define the scope and responsibilities of each process: It is important to clearly define the scope and responsibilities of each process to ensure that there is no overlap or duplication of effort. This might involve establishing clear roles and responsibilities for risk identification and RCSA activities, as well as defining the types of risks that each process is responsible for identifying and managing.


c. Communicate effectively: Effective communication between the risk identification process and the RCSA process is essential to avoid conflicts. This might involve regular meetings or updates to ensure that each process is aware of the activities and findings of the other.


d. Use a risk register: A risk register can be a useful tool for tracking and managing risks identified by both the risk identification process and the RCSA process. By using a single, centralized repository for risk information, the bank can avoid conflicts and ensure that risks are being managed consistently across the organization.


Risk Identification and Third Line of Defence

In a risk identification process, the third line of defence refers to the individuals or groups within an organization who are responsible for providing assurance that the organization's overall risk management framework is effective. This might include functions such as governance, regulatory compliance, or legal.


The role of the third line of defence in a risk identification process is to provide oversight and assurance that the organization's overall risk management framework is effective and that risks are being identified, assessed, and managed in a coordinated and consistent manner. This might involve reviewing and testing the effectiveness of the organization's risk management framework, providing assurance to senior management and the board of directors about the effectiveness of the risk management process, or providing recommendations for improving the risk management framework.


The third line of defence is typically considered to be the third line of defense against risks because it provides a broad perspective on risk management within the organization and can help to ensure that risks are being managed in a coordinated and consistent manner. By providing assurance on the effectiveness of the organization's risk management framework, the third line of defense can help to protect the organization from potential losses and ensure that it is well positioned to achieve its strategic objectives.



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