Top Risks for Banks

Enterprise risk management has become a widely talked-about topic across the industry by both bankers and regulators. As risk managers and bank executives work to keep pace with rapid innovation and increased regulatory pressure, there are so many Risks facing financial institutions.

With examiners continuing to raise the bar for enterprise risk management, they have identified several Risk categories that banks should pay particular attention.

Credit risk

When it comes to credit risk, risk managers must have a good “situational risk awareness” of current market conditions, monetary policy and potential sector-specific disruptors, and understand how those factors affect the bank’s balance sheet.

In addition to having a good awareness of external factors, it is important for the board and bank management to continually revisit their risk appetite framework as market conditions change or new products roll out. And when considering growth opportunities, banks should carefully assess whether risk exposure will increase.

Market risk

Uncertainty surrounding the current rate environment is among the top concerns related to market and liquidity risk. Global markets are realizing that since the crisis, central banks don’t have a lot of policy left to tackle emerging crises as they happen.

With that in mind, banks should ensure that boards and management understand the implications of the current rate environment and their level of interest rate exposure, and conduct sensitivity testing under different rate scenarios. They should also carefully consider whether reaching for extra yield is worth taking on higher liquidity risk.

Operational risk

As new rules and regulations are issued, expanded and revised, many banks are layering new compliance functions on top of existing operational practices, which can lead to inefficiencies that not only expose the bank to more risk, but also negatively affect the bottom line, One way to mitigate this risk is to implement a process review and improvement program to identify and correct operational inefficiencies. Bank management should work closely with compliance, Risk management and Audit teams to set operational performance targets for the institution while ensuring that any improvements don’t compromise compliance standards.

Another area Risk managers should be focused on from an operational perspective is information security. With cybercrime continuing to evolve, the potential for a large-scale, coordinated cyber-attack by a terrorist organization is increasing something the entire industry should be preparing for.

 

Compliance risk

Compliance has become a central point of focus in the years.  With more staff time and resources being diverted to compliance functions, there is an underlying risk of what’s not being focused on as a result of focusing on all the rules and regulations. So banks should use modeling tools to assist with their compliance processes, for instance, accurate data input is critical. If the wrong assumptions go into modelling, it could lead to greater Risk exposure.

Strategic and reputational risk

When assessing strategic and reputational risk, it’s really thinking about change, and knowing that game changers are currently at play within the industry. As new technologies and alternative financial service providers emerge, banks must be forward-looking and strategic in meeting challenges and opportunities they present.

The future of enterprise risk management

Enterprise risk management will undoubtedly continue to take on even greater regulatory significance for institutions of all sizes in the months ahead.  But it’s essential for banks to understand not only the risks related to specific areas, but how those risks intersect and affect the entire enterprise.

Building a strong risk management culture should be first and foremost as business priority. “Do (ERM) for your firm first.

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