Introduction

Whilst ERM can be applied to any organisation, this book concentrates on financial institutions. There is, of course, an enormous range of such institutions; however, detailed analysis is limited to four broad categories of organisation:

• banks;

• insurance companies;

• pension schemes; and

• foundations and endowments.

Before looking at the risks that these organisations face, it is important to understand their nature. By looking at the business that they conduct and the various relationships they have, the ways in which they are affected by risk can be appreciated more fully. This is the first – and broadest – aspect of the context within which the risk management process is carried out.

Banks

A direct line can be drawn to current commercial banks from the merchant banks that originated in Italy in the twelfth century. These organisations provided a way for businessmen to invest their accumulated wealth: bankers lent their own money to merchants, occasionally supplemented by additional funds that they had themselves borrowed. The provision of funds to commercial enterprises remains a core business of commercial banks today.

By the thirteenth century, bankers from Lombardy in Italy were also operating in London. However, a series of bankruptcies resulted in the Lombard bankers leaving the United Kingdom towards the end of the sixteenth century, at which point they were replaced by Tudor and Stuart goldsmiths.