 Hey guys, it's MJ, the student act tree, and today I'm going to be asking what is enterprise risk management and what better way to start than by looking at a definition given by a guy who's written an entire textbook on the subject. And his name's James Lum and he says enterprise risk management is a comprehensive and integrated framework for managing credit risk, market risk, operational risk, economic capital and risk transfer in order to maximize value. That's quite a long definition so let's break it down into its parts. So the first thing is he speaks about a comprehensive and integrated framework. And what he's meaning here is that enterprise risk management or ERM looks at risk from, it takes a step back and looks at what is the big picture. It tries to manage the entire forest regarding risk instead of looking down and isolating each tree of risk or as he mentions the different silos of risk. So we're going to be looking at risk from a holistic point of view. And that's one of the core things of enterprise risk management is this holistic view. And what is this holistic view of? Well let's look at the next part of the definition where he talks about the three main types of risks in business, credit risk, market risk, operational risk. Credit risk is when someone defaults or doesn't pay you back money that they owe to you. Credit risk is when something in the market beyond your control goes wrong or different to what you want. So commodity prices change and this hurts you or something like that. Operational risks are internal risks that's like when a key person who runs your whole business suddenly leaves or when someone does fraud inside a business that those all operational risks. So those are the three main risks that he's going to be looking into. He mentions this thing called economic capital and I should know this because I did CA1 and SD5 which dealt with economic capital but I did have to go and refresh my mind by looking at Wikipedia and the definition for economic capital says in finance it's mainly for financial service firms. Economic capital is the amount of risk capital assessed on a realistic basis which a firm requires to cover the risks that it is running or collecting as a going concern such as market risk, credit risk, legal risks and operational risk. It is the amount of money which is needed to secure survival in the worst case scenario. Firms and financial service regulators should then aim to hold risk capital of an amount equal at least to economical capital. So ERM is also going to be focusing on how much money should a company hold in order to absorb risks or to make sure that it doesn't go into ruin and then another thing which as an act tree we know lots and lots about it's this whole idea of risk transfer. You would be more familiar with the term insurance and that is the idea of taking a risk that you do not have an appetite for and paying someone to take it on your behalf. That's basically what insurance is. So ERM while looking at all these different types of risks it also looks at business insurance that a company should take on in order to continue doing its daily activities. And now we come to the final part of the definition which is probably the most important and that is enterprise risk management is not there to make more admin or increase the paperwork for companies but instead it is there to maximize a firm's value. So it is there to make money. So companies that take enterprise risk management should expect their profits to increase or to stabilise and it has financial benefits. So it's a very important subject for anyone who loves capitalism and wants to make lots of money as it will take a business and it will maximise their value. So yeah that is a very very short introduction to enterprise risk management. If you enjoy this topic then please subscribe because I will be making more videos regarding enterprise risk management as it is the core subject of an exam I'm going to be writing soon. But yeah thanks guys for watching and I'll see you next time. Cheers.