Building a risk appetite framework for “Shosha” (trading firms)

Interview with MITSUI & CO., LTD. October, 2017

Tsuyoshi Oyama (Partner / Head of Center for Risk Management Strategy, Deloitte Touche Tohmatsu LLC) discussed "Risk appetite framework" with Takehiro Kanazawa (General Manager, Risk Management Division, MITSUI & CO., LTD.) and Kensuke Shuto (General Manger, Country Risk Department, Risk Management Division, MITSUI & CO., LTD.).

Excerpts from the interview

Trends of risk quantification among trading firms in the early 2000s

Oyama: How have trading firms worked on risk quantification to date?

Kanazawa: Generally speaking, up to the 1980s, many trading firms focused on sales revenue as a quantitative performance measurement indicator. Later on, accounting profits replaced sales revenue. Around 2000, firms began watching more closely how much risk was taken in relation to earn these profits, in other words, they started to put more importance on quality of profit and risk-return metrics.  …and more 

From the limitation of backward-looking methods to the birth of forward-looking methods

Oyama: Financial institutions thoroughly adopted the risk management methods of Basel II, but the more they were put into use, the more their shortcomings were revealed. The largest reason for this was the limitation of risk quantification methods.

Up until Basel II, in principle, risks were defined by regulators based on past events. In other words, risk management was designed to prepare against the fluctuation of risk factors in a given period of time, or against severe stress events both of which have occurred in the past. …and more 

Efforts to reflect stress scenarios in mid-term business plans

Kanazawa: This year, our firm has established a new three-year business plan, for which we began considering last year if we would include stress scenarios and stress tests. As external analysts have also pointed out, our profits heavily rely on natural resource related businesses. In recent years, our management has been focusing on growing profits in other business lines and discussed strategies in the two categories of “resource” and “non-resource” businesses. In the last mid-term business plan, we introduced a new categorization method that identified seven business segments to expand …and more 

Revitalize risk communication through the introduction of a RAF

Kanazawa: A conventional approach to deal with risks in corporate management tries to simply avoid them as risks are dangerous. A “risk appetite” approach, as the term “appetite” itself signifies, intends to take certain risks for the purpose of growth. Traditionally at our firm, the latter was not a philosophy of the risk management division, but rather of the corporate planning and business development. By introducing a RAF, we can balance containing and taking risks, which fits well into the expectations of the current demanding society. …and more 

Difference in a time horizon of risk exposure

S: I sense that there are some differences in approaches toward “appetite” between financial institutions and trading firms. My impression is that it is easier for securities companies and financial institutions to take risks when they have an appetite for them. I am not saying that it is easy to increase risk exposure through increasing the holding of securities and loans in countries and regions that expect economic growth. But it may be more achievable than the business investments that trading firms make. Even in the case of loans, as their maturities could be adjustable, it is relatively easy to narrow a country’s exposure when the market condition worsens. …and more 

有限責任監査法人トーマツ リスク管理戦略センター センター長 パートナー 大山 剛
Interviewer: Tsuyoshi Oyama (Partner / Head of Center for Risk Management Strategy, Deloitte Touche Tohmatsu LLC)
三井物産株式会社 リスクマネジメント部長 金澤 赴弘 氏
Interviewee:Takehiro Kanazawa (General Manager, Risk Management Division, MITSUI & CO., LTD.)
三井物産株式会社 カントリーリスク統括室長 首藤 賢典 氏
Interviewee:Kensuke Shuto (General Manger, Country Risk Department, Risk Management Division, MITSUI & CO., LTD.)

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