Dealing with risk is part and parcel of running a business, and no one should take on a leadership role in a big company without expecting to confront risk at some point. However, knowing how much money they’re responsible for and how many clients they’re accountable to, financial institutions are understandably extra careful around issues of enterprise risk and risk management. Decision-makers in traditional banks tend to err on the side of conservative and reactive risk management, an approach that may have adequately served their needs in the past. But given how quickly today’s financial landscape is evolving, there’s a case to be made for retooling old risk management strategies and taking on a more proactive and innovative approach to risk.
If you play a role in determining your bank’s risk management strategies, you can resolve to put more emphasis on the “strategic” element of the process in the near future. It will not be enough to think of risk as an afterthought, or to only deal with it when the consequences have already materialized. You can help your organization thrive in a highly competitive business environment by doing the following:
- Increasing your foresight over the complex nature of financial risk,
- Upgrading your response to multimodal risk with new risk management software, and;
- Fortifying your bank’s risk management system so that you can test scenarios and craft appropriate risk responses.
To illustrate further, here are four points that discuss the need to change your bank’s risk management strategy and what the most effective changes will entail.
It’s Worth Shifting from Tactical Risk Management to Proactive Risk Management
The first thing that you should consider doing is to shift from a paradigm of tactical and short-term risk management to risk management that accommodates a “bigger-picture” perspective. Most banks are moderate in their forays of risk, often only pursuing the type that relates to bank operations and IT. While it’s important to formulate risk strategies for these aspects of doing business, the ball shouldn’t stop there. Now’s the time to make plans for confronting risk that relates to the bank’s business objectives and its eventual growth in the digital era.
Shifting gears from a mostly tactical, short-term response to risk and adopting a more proactive, innovation-driven risk strategy instead will prepare your bank for an uncertain future. With your eyes trained not only on your organization, but on the industry at large, you’ll definitely be better equipped to navigate the testy waters of modern finance.
You Should Heighten Your Understanding of Multimodal Risks to Your Organization
Another argument for retooling your risk management strategy is that your current approach may be too dependent on an amorphous definition of risk. There’s no single idea to define the risk that a financial organization will face in its lifetime—that risk is multifaceted and can be further broken down into the concepts of credit risk, market risk, liquidity risk, and the like.
Your risk management approach should involve a system for consolidating and appraising these particular risks. This system will guide your study on the implications of each particular type of risk, and as a result, determine the best capital management strategies and other initiatives that your bank can take in order to be more risk-responsive.
You Need a Single Source of Truth to Streamline Your Risk Assessment
It will also be good for your bank to shift to a more data-driven approach to your risk management. One way that you can do this is by reforming your data strategy and streamlining all the risk-related data that goes through your organization.
What you’ll need is a strategy that anchors itself on a “single source of truth,” or a means of aggregating and consolidating all your bank’s risk-related data into one unified, up-to-date repository. You should also establish a risk governance mechanism, which will oversee the execution of structured methods for collecting and analyzing risk-related data. Armed with a 360-degree view of the risks to your organization, as well as a reliable way to assess their impact, you will be in a better position to decide on business-critical financial matters for your company.
You Should Test Your Current Risk Management System Exhaustively for Added Resilience
Lastly, you should adopt a risk management strategy that involves regular testing of your organization’s risk threshold. As a stakeholder to your bank’s financial future, you should be able to imagine what will happen to your organization if it encounters a certain type and amount of risk in a certain situation. You wouldn’t want to wait until that event actually transpires in real life before you figure out the most effective risk response.
Regular stress testing on your bank’s risk management system will help you pinpoint how resilient your bank actually is to different types of risk, plus what you can do to fortify your systems, protocols, and capital allocations. Of course, there’s no guarantee that your bank won’t incur financial losses even after onboarding better risk management infrastructure. But the blows will be less likely to cripple your organization, and the road to your recovery won’t be as laden with obstacles.
There’s no doubt that the financial industry is a risky one to operate in. However, how you perceive the risks and how you choose to respond to them largely depends on you. The institutions that are most likely to succeed are the ones who can create opportunities despite—or perhaps even because of—the existence of risks. Knowing that, consider retooling your risk management strategy now and giving your organization a fighting chance for the future.