Whether you’re a young bank just starting out, or one that’s been operating for decades, it’s likely that you haven’t thought too much about your risk management strategy. Nevertheless, keeping up with risk as a banking organization is something that every institution should consider on a regular basis.
As the risks of lending and other banking activities become more stringent and regulations grow more stringent by the moment, banks need to increase their risk management strategies if they want to remain strong and successful in the future. Read on to learn how you can create the most effective risk management strategy for your bank — no matter its size or operational scope — while also protecting your business and capital.
What is risk management?
Risk management is the process of identifying and managing the risks associated with an organization or an asset. It is a key component of all business operations, no matter if the business is large or small. In banking, risk management starts with assessing the risks that your business faces, and then implementing strategies to minimize or eliminate those risks if possible. Risk is simply the potential for loss.
But, like anything else in life, risk can be managed to produce positive outcomes. Your risk management strategy includes everything from determining your financial goals to selecting your banking partners and making sure your internal processes are in order. It will also include how you assess and monitor your own risk-taking behaviors, how you assess the risks of your competitors, and how you assess your customers’ risk.
The importance of risk management
Risk management for banks is important in any business, large or small. It’s particularly crucial in banking because of the large amount of financial risk that banks face. In fact, banks are one of the most at-risk sectors of the financial system, with a risk rating of 6 out of 10.
The goal of a sound risk management strategy is to identify and manage those risks effectively, thereby maximizing your potential for success while minimizing your potential for catastrophic loss. If you don’t have a solid risk management approach in place, you risk putting your business and your customers at risk. If you don’t have a solid risk management strategy, you risk losing significant amounts of money.
The key risks banks need to manage
As a bank, your key risks will likely fall into one of two categories — operational risks and regulatory risks. Operational risks are the everyday risks inherent in banking — everything from human error and fraud to severe weather and IT failures. As the name suggests, these risks are inherent in the day-to-day operation of your bank, and they are difficult to control. Because operating a bank is such a complex and chaotic activity, it’s unlikely that you’ll be able to eliminate all operational risks altogether. Nonetheless, you can limit them as much as possible, and you can do that by keeping your organization lean and efficient, operating with a strong level of controls, and making sure you have a solid risk management strategy in place.
How to develop a risk management strategy for your bank
Developing a successful risk management strategy will depend largely on the type of bank you own.
The various risks present in a particular financial institution will vary greatly, so it’s important to fully understand your own bank’s risks so you can build a sound risk management strategy. When it comes to managing your bank’s operational risks, you’ll want to first identify and understand those risks.
Once you have a good understanding of your own bank’s risks, you can begin to implement strategies to mitigate them. Start by understanding your own bank’s risks. The most obvious way to do this is to conduct a thorough assessment of your own bank’s risk profile. Next, identify key risks that are particularly relevant to your bank. For example, if your bank primarily serves individuals, one of your key risks may be the risk of nonpayment or bankruptcy on the part of your customers.
Different risk management strategies for different banks
Risk management strategies vary greatly from one bank to the next, depending on a multitude of factors. Some of these factors include your bank’s overall size and scope, your industry’s risk profile, and your own personal preference. Many factors will likely play a role in determining the best risk management strategy for your bank, but the most common factors include: –
Your bank’s overall risk profile: Every bank faces different risks, which means that the risk management strategy you choose will also vary depending on your bank’s overall risk profile. For example, a small community bank with only a moderate amount of risk may be able to do away with a risk management strategy altogether. On the other hand, a larger bank with a heavy regulatory burden and a more complex operations may need to implement a more robust risk management strategy in order to stay compliant.
– The breadth and depth of your risk assessment: The level of detail in your risk assessment will largely determine the level of rigor in your risk management strategy. The more thorough your risk assessment, the more likely you are to identify and manage your own bank’s key operational risks effectively. A basic risk assessment will likely be relatively light in terms of depth, which means that it will likely result in a relatively straightforward risk management strategy.
– How committed your bank is to managing its risks: Different banks will be more focused on risk management than others, and that will largely determine the level of rigor in their risk management strategy. A bank that’s committed to reducing its risks will likely have a robust risk management strategy in place, while a bank that sees risk management as a necessary but far-off process may only implement a basic strategy.
How to build a risk management strategy for your bank
A sound risk management strategy starts with understanding your own bank’s own risk profile. Once you have a good understanding of your own bank’s key operational risks, you can begin to implement strategies to mitigate them.
To begin implementing your risk management strategy, first make sure you understand your own bank’s risks. Once you have a good understanding of your own bank’s risks, you can begin to implement strategies to mitigate them.
– Understand your own bank’s risk profile: The first step in implementing a sound risk management strategy is understanding your own bank’s risk profile. – Identify key operational risks: Once you have a good understanding of your own bank’s risk profile, you can begin to identify and mitigate key risks. – Implement effective controls: Once you’ve identified your own bank’s key operational risks, you can implement effective controls in order to minimize their threat.
– Conduct regular risk monitoring: The final step in implementing a sound risk management strategy is to regularly monitor your own bank’s key operational risks.
Conclusion
Risk management strategies are often described as being ‘robust,’ and a robust risk management strategy is one that effectively manages all of a bank’s risks. A robust risk management strategy is one that fully understands a bank’s risks, manages them effectively, and is well-resourced enough to implement controls in the event of a crisis.
