Financial Institutions
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Risk Management

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

In this video, Gilligan shares her thoughts on risk management with Duncan Martin, a senior partner and managing director in BCG’s London office and coauthor of Rethinking Risk Management in Financial Services: Practices from Other Domains.

Marc Castellnou on Risk Management in Firefighting

An Interview with the Head of Fire Analysis and Strategy, Fire Service of Catalunya

In this video, Castellnou discusses how risk is perceived and managed in the firefighting industry.

Financial Institutions

Gerold Grasshoff on How Financial Institutions Can Take a Proactive Approach to Managing Risk

In this video, BCG’s Gerold Grasshoff, senior partner and managing director, Frankfurt, discusses the key lesson banks learned from the financial crisis: risk management.

The banking business is full of risks, large and small. The greatest risks demand the most attention:

  • Credit risk generated by lending activities
  • Market and counterparty risk from trading activities (especially derivatives trading)
  • Liquidity risk arising from mismatched assets and liabilities
  • Operational risk caused by error and omission in core systems and processes
  • Risk associated with writing insurance contracts

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

Four Key Questions for Financial Institutions

How can an institution efficiently manage its financial resources?

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.

How can the effectiveness of risk management be improved?

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.

What is the impact of new regulatory requirements?

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.

How can an institution manage its biggest risks?

Financial institutions first need to identify their biggest risks. Once identified, those risks must be understood and managed at every level.

Strengthening Risk Management Across the Business

Financial institutions can focus on six primary areas when reviewing risk management activities.

  • Bankwide Risk and Resource Management. Define a framework for identifying, managing, and reporting risk across the organization.
  • New Regulations. Assess the impact and support the implementation of new regulations.
  • Risk Operations Excellence. Create an operating model for risk management.
  • Risk Information Technology. Evaluate the technology infrastructure for risk management, and define a strategic architecture for it.
  • Risk Analytics. Measure risk across the company using sophisticated data analysis.
  • Insurance Risk. Comply with insurance regulations and manage insurance-related risks.