Risk Management

Risk Ownership, ERM Practices, and the Role of the Finance Function
Christopher D. Ittner and Daniel Oyon

Abstract: This study provides exploratory evidence on the associations between the assignment of senior-level “risk ownership” and the sophistication of the enterprise risk management (ERM) process, differences in ERM sophistication in firms with single versus multiple risk owners, and the relationship between CFO risk ownership and the Finance function’s role in the ERM process. Using a global, multi-industry survey, we find ERM sophistication positively associated with broader risk ownership and the assignment of risk ownership responsibilities to the CFO. Finance functions in firms with more sophisticated ERM practices and with CFOs who are risk owners also tend to contribute to the identification, monitoring, and management of a broader range of financial, operational, and market risks. Firms with more sophisticated ERM report that they were better prepared when they encountered major risk events and are in stronger competitive positions. However, differences in risk ownership are not directly associated with these outcomes after controlling for ERM sophistication.

A New Indicator of Bank Funding Cost
Eric Jondeau, Benoît Mojon, and Jean-Guillaume Sahuc
Swiss Finance Institute Research Paper No. 20-20

Abstract: We construct a new indicator of rollover risk for banks, called forward funding spread. It is calculated as the difference between the three-month forward rate of the yield curve based only on instruments with a three-month tenor and the corresponding forward rate of the default-free overnight interest swap yield curve. Its advantage is threefold: (i) it accounts for market participants’ expectations of how funding costs will evolve over time, (ii) it identifies liquidity regimes, which coincide with the levels of excess liquidity supplied by central banks, and (iii) it has higher predictive power for macroeconomic and banking variables than well-known spreads.