Let’s review the current state of the banking industry
The 2023 regional bank crisis has dealt a resounding blow to the industry, with reverberations being felt across markets and impacting financial institutions on a global scale. With soaring credit defaults, liquidity constraints, operational disruptions, and mounting regulatory pressures, banks find themselves in the eye of a storm. Now more than ever, proactive and agile risk management practices are critical for both immediate survival and long-term success.
As banking regulators mandate enterprise risk management, banks require a well-established capability to catalog critical business processes, assess risks associated with them, define compensating controls, and monitor these controls through risk and control owners. It’s the bedrock for constructing a solid enterprise risk management program.
[ Learn more about integrated risk management in financial services. Watch the webinar: Making the Case for Integrated Risk Management Across The Three Lines of Defense. ]
Risk management strategy: 5 key questions.
Let’s examine five critical questions financial institutions must ask themselves about their risk management strategies to navigate the stormy waters ahead. By addressing these questions head-on, they’ll be able to fortify their defenses, boost resilience, and lay the foundation for a prosperous future in the face of economic and regulatory uncertainties.
1. How well do you understand your risks?
At the heart of a sturdy risk management strategy lies a deep understanding of the inherent risks banks face, such as the risks posed by IoT, mobile apps, and cybercrime in today's digital era. As these technologies provide convenience and connectivity, they also expose banks to data breaches and other potential threats. Astute leaders will also recognize the importance of meticulously identifying and assessing their risks across credit, liquidity, operational, and regulatory domains.
2. Have you defined your risk appetite and tolerance?
Successful banks chart a clear course through the labyrinth of risk management by defining their risk appetite and tolerance, then aligning their appetite for risk with overarching business objectives, strategies, and regulatory requirements, to balance risk and growth. Honest collaboration between a bank's board and regulators is crucial for a reliable assessment of risk appetite. As the board sets the bank's strategic direction and risk tolerance, working openly with regulators ensures alignment with regulatory guidelines. Working with regulators to establish well-defined risk limits and thresholds also enables effective risk monitoring, navigation of risk boundaries, facilitating prudent decision-making at all levels.
3. How robust is your risk management framework?
A resilient risk management framework is the foundation of effective risk mitigation, and enlightened leaders recognize the critical components that underpin such a framework: meticulously crafted policies, comprehensive procedures, robust governance structures, and transparent reporting mechanisms. By using a risk management framework to seamlessly integrate risk management into their decision-making processes, banks can proactively anticipate and respond to emerging risks.
When asked about their enterprise-wide internal controls framework, 63% of financial services and insurance CROs said that “internal controls optimization, simplification, and coordination will be an extremely or very high priority for their institutions over the next two years.”
—Deloitte Risk Management Survey
4. Are you embracing technological innovations?
Savvy bank executives recognize that innovation is the key to unlocking new frontiers in risk management. Advanced technologies, from cutting-edge analytics to artificial intelligence (AI) and machine learning algorithms, empower institutions to leapfrog traditional risk assessment methods. By harnessing automation, for example, banks can gain real-time visibility to promptly identify emerging risks, make data-driven decisions, and optimize risk management processes with precision.
“Credit assessment, KYC (Know Your Customer), anti-money laundering, fraud, and collateral management are complex processes within the lending lifecycle,” says Guy Mettrick, Industry VP, Financial Services at Appian. “These processes are well-suited for automation, especially within retail banks, corporate banks, and institutional banks."
“Customizable process automation platforms offer the most value when it comes to optimizing the efficiency, effectiveness, and decision-making speed in lending operations,” says Mettrick. “Automation capabilities provide greater visibility into risk assessment and an organization's risk appetite, which are crucial factors for financial institutions' success.”
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5. Do you have a strong plan for crisis response and business continuity?
Crises are an unfortunate reality in the dynamic world of finance, necessitating robust and meticulous planning. Forward-thinking banks anticipate potential disruptions and proactively develop comprehensive crisis response and business continuity plans. By fine-tuning communication strategies, establishing escalation protocols, and coordinating with regulators and stakeholders, banks can navigate economic regulatory uncertainty with confidence.
In the wake of the tumultuous 2023 bank crisis, banking leaders must confront these five crucial questions head-on. Armed with comprehensive insights into risks, a well-defined risk appetite, a robust risk management framework, the right process automation platform, and meticulous crisis response plans, institutions can fortify their risk management strategies and build organizational resilience now and in the future.
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