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.
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Gerold Grasshoff on How Financial Institutions Can Take a Proactive Approach to Managing Risk
The banking business is full of risks, large and small. The greatest risks demand the most attention:
Transparency in the face of tighter regulation is a key requirement for banks attempting to regain or maintain profitability.Read the BCG report Global Risk 2014-2015: Building the Transparent Bank.
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.
New 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.
Financial institutions can focus on six primary areas when reviewing risk management activities.