The banking business is full of risks, large and small. The greatest risks demand the most attention:
Three of the principal issues facing banks and other financial institutions today are regulatory compliance, adapting risk management models to a shifting environment, and minimizing risk in a cost-effective way. Above all, financial institutions must take a proactive approach to managing risk.
Gerold Grasshoff on How Financial Institutions Can Take a Proactive Approach to Managing Risk
The banking industry has entered a new era in which frequent changes to regulatory requirements are becoming the norm. This evolving environment significantly changes the way banks compete. Yet the trend of ongoing regulatory updates is still perceived by many as a temporary wave.
The fact is that the tide of regulatory change is not rising just to recede again in the near future. Rather, it is like a continuously rising sea level, one that is here to stay and that will become part of daily operations, necessitating a change in how banks run their businesses. Banks and all financial institutions must professionalize how they deal with regulatory compliance in order to adapt to this trend.
Moreover, although it has been nearly ten years since the global financial crisis first erupted, the banking industry is still feeling its consequences. Banks in different regions have recovered and advanced at different speeds, illustrated by their highly diverse profitability profiles today. Ultimately, implementing effective risk and compliance functions will be critical to gaining and maintaining healthy levels of profitability.
As financial institutions employ capital and maintain liquidity, they must adhere to strict regulatory requirements. At the same time, they need to find the best opportunities to earn a return and satisfy shareholders.
Companies should continually evaluate whether their risk management procedures are adequate. As requirements change, financial institutions have to consider the implications for governance, systems, and infrastructure.
Regulations such as Basel III in banking, Solvency II in insurance, and International Financial Reporting Standard 9 are forcing companies to create new systems to ensure compliance. Companies must also manage costs associated with the increasingly strict regulatory climate.
Financial institutions first need to identify their biggest risks. Once identified, those risks must be understood and managed at every level.
Banks face many sources of risk. Regulatory and competitive pressures are forcing institutions to confront them and manage them rigorously. But how can banks know where to begin? Sometimes, it’s useful to explore how risk is managed in other industries.
FAA’s Peggy Gilligan on Risk Management in Aviation
An Interview with the Associate Administrator for Aviation Safety
Marc Castellnou on Risk Management in Firefighting
An Interview with the Head of Fire Analysis and Strategy, Fire Service of Catalunya