The banking industry is no stranger to crises, and 2023 has proven to be a challenging time for banks worldwide. As financial institutions face a multitude of risks and uncertainties, robust risk management practices are essential for success. In this post, we’ll delve into the significance of risk management in weathering the 2023 crisis and offer key strategies for successfully navigating these turbulent times.
Beware the impact of social media.
In today's interconnected digital world, the speed at which information travels has reached unprecedented levels. Social media platforms have magnified the dissemination of rumors and concerns, particularly when it comes to the banking industry and depositor sentiments. In the current digital landscape, a single post in the morning can swiftly trigger a chain reaction, culminating in a run on deposits within a matter of hours. This phenomenon demands heightened awareness from banks.
“Banks often engage in what is known as maturity transformation,” says Guy Mettrick, Industry VP, Financial Services at Appian, which provides process automation and low-code platform solutions to the banking industry. “They commonly borrow funds on a short-term basis and channel these resources into long-term lending endeavors. This fundamental practice carries inherent risks,” he says, ”particularly when exacerbated by the rapid dissemination of rumors facilitated by social media, which may have contributed to the 2023 crisis.”
Moving forward, Mettrick says, financial institutions must bolster their capabilities for monitoring social media and implement robust protocols to manage this risk and identify and address emerging concerns in this new era of digital connectivity. Indeed, social media exposure and incident management must be considered part of modern enterprise risk management.
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Seeds of the 2023 crisis.
Beyond the impact of social media, the 2023 banking crisis has been fueled by global economic instability, market volatility, and geopolitical uncertainties. Trade disputes, policy changes, and technological disruptions have also intensified the crisis, posing significant challenges for banks everywhere. The resulting credit defaults, liquidity challenges, and operational disruptions put pressure on profitability, asset quality, and overall financial stability, making it more important than ever for banks to fortify their risk management frameworks.
Strengthen your risk management strategy.
Prioritize CLM and KYC pain points
Compliance is a core tenet of a financial services organization’s day-to-day operations, and Know Your Customer (KYC) and customer lifecycle management (CLM) activities are intertwined with risk management. Embedding risk management practices throughout the customer journey enables banks to assess, mitigate, and monitor the risks associated with customer onboarding, credit, compliance, fraud, and more. Here are six obstacles that hamper institutional efforts to manage risk and compliance:
- Siloed data: Information that is not readily accessible to those who need it prolongs onboarding and causes frustration for employees and customers alike.
- Inefficient risk assessment: Financial institutions need an efficient way to assess customer information and make informed decisions to avoid unnecessary risks.
- Irrelevant information: Financial organizations often find themselves sifting through heaps of unrelated data to get what they need.
- Fragmented processes: Activities across systems and silos take longer than they need to, diverting time and energy from value-driven tasks.
- Manual tasks: These make the KYC and customer onboarding process longer than necessary and take time away from other business-building activities, like prospecting and customer service.
- Inflexible compliance management systems: Adapting to fast-evolving regulations while abiding by corporate policies requires flexibility, which legacy technology doesn’t always allow.
Leverage technologies such as data fabric, AI, and process automation.
Overcoming complex challenges extends to maintaining strong customer relationships, ensuring compliance with AML and KYC regulations, retaining customers, and enhancing the customer experience, which is a top growth priority for 48% of organizations, according to audit, tax, and consulting firm RSM US, LLP. Technology plays a pivotal role in optimizing the customer experience and managing risks, and banks have been embracing advanced analytics, artificial intelligence (AI), and machine learning to analyze vast amounts of customer data, identify patterns, and assess risks with accuracy and efficiency.
"The role technology plays in gaining a real-time understanding of an organization's inner workings cannot be overstated,” says Mettrick. “Traditional batch processes are no longer sufficient in today’s fast-paced financial landscape. Organizations must embrace real-time monitoring and analysis to effectively manage factors like liquidity and balance.”
“By harnessing advanced technology like data fabric, AI, and process automation, decision-makers gain comprehensive visibility and the ability to quickly respond to emerging challenges,” says Mettrick. “It's about gaining insights in real-time and taking immediate action. The key is leveraging technology to stay agile and responsive, ensuring your organization can navigate complex environments successfully. To save time and cost, organizations must find better ways to use their existing resources to mitigate technical debt. Ripping and replacing legacy systems is often not an option.”
Moving forward, Mettrick says, financial institutions must bolster their capabilities for monitoring social media and implement robust protocols to manage this risk and identify and address emerging concerns in this new era of digital connectivity. Indeed, social media exposure and incident management must be considered part of modern enterprise risk management.
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Promote a risk management culture.
While technology is great at augmenting human labor, people are also an important part of any risk management strategy. Skilled risk management professionals possess the expertise to assess risks, design mitigation strategies, and monitor risk exposures. Banks need to promote a risk-aware culture throughout the organization and make continuous training in the risk management part of the process.
Here’s the bottom line: By prioritizing strategies to strengthen credit risk management, manage liquidity risk, mitigate operational risk, and address regulatory and compliance risks, and by leveraging technology, nurturing skilled risk management professionals, and fostering collaboration, banks can weather the 2023 crisis and create a solid foundation for sustainable success in an ever-changing banking landscape.
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