The regulatory landscape for financial institutions, post the 2008 macroeconomic crisis, has drastically changed over the years. Financial organisations must comply with new rules, stringent disclosure requirements, and precise regulatory reporting.
This has led to adherence obligations, which is driving the financial service providers to be more proactive with compliance issues. However, till this date, many financial institutions still lack a comprehensive risk view program, but with the advent of new age technologies they can now put in place an Enterprise-wide Risk Management (ERM) module more effectively and at much reduced costs.
Operational Challenges Related to Enterprise Risk and Compliance
Here are the major operational challenges that financial service providers are facing today
- Inability to combine policy regulations and decision-making support systems.
- Requirement for extensive stress tests and evaluations for capital and P&L
- Need for jurisdiction-specific regulatory reports
- Necessary periodic consolidation of know-your-customer (KYC), anti-fraud, and anti-money laundering (AML) operations
Hence, financial institutions need a robust technology framework to address these critical challenges around enterprise risk management, so that they have a complete risk-based monitoring of business processes and regulatory adherence.
Need and Opportunity of ERM for Financial Services Firms
1. ERM requirements in the banking and financial services sector, as it is for any other business segment, is primarily driven by internal and external pressures.
2.The major external pressures are almost common to all business models around the world. It usually varies on signals from institutional investors, stock exchanges, accounting bodies, and government regulators pressuring for reforms in corporate governance.
3.The internal pressures particularly come from business risks and conditions that are unique to the financial service industry, especially the ones arising from a cutthroat competitive environment.
4.Financial institutions, it must be noted, are in a business that takes on other people’s risks, which is why they are socially obligated to get their ERM right. A financial organisation that can, in fact, demonstrate a well strategized ERM plan will increase its credibility in the marketplace, and will most likely attract and retain more clients.
5. Moreover, the industry is right now in the middle of a transformational change in terms of technology, customer expectations, and distribution systems, leading to new risks and highly challenging environments. The convergence of banking sector along with insurance is also creating further uncertainties and increased levels of scrutiny.
Even in a high-risk environment like this, institution managers will still have to maximise the value of their businesses by making precise decisions about –
- Hedging and reinsurance
Implementing ERM in the Financial Service Sector
The financial industry needs dynamic tools and models to address the recent complexities in its operational pattern. Principally, as reported by many surveys, the members on board believe that ERM will help transform their business, solving critical strategic challenges in diverse fields like mergers and acquisitions, earning consistency to growth, and capital management.
Various studies further indicate that financial service managers think ERM can ground a comprehensive framework to accommodate the complexities of their businesses. They also believe, technology can bring to their disposal the required tools in order to effectively model and manage organisational risks specific to the finance industry.
To attain this objective, financial establishments should first recognize and take into consideration the risk environment they operate within. This essentially means, sensing the external pressures like –
- Social, economic, and legal trends
- Political and regulatory mood
- Changes in customer, and competitor behaviour
Next, comes the operational and financial risks. Financial institution managers will have to outline a set of risk management programs that include the following financial strategies –
- Capital structure
- Investment strategy
- Dynamic product mix and pricing
- Hedging and reinsurance
They will also have to incorporate operational strategies like –
- Hiring and training
- Incentive programs
- Effective internal controls
- Technology integration
- Seamless customer service
- Market strategy and distribution
It needs to be understood that both the domains of financial and operational strategies can attract inherent risks attached to them.
Institution managers need to holistically apply the comprehensive knowledge of financial and operational risks and treat them together in order to manage their portfolio effectively.
By implanting technology models in managing the operational and financial risks framed in this document, financial service executives can, in fact, accomplish their objective of enhancing the enterprise value.
Furthermore, by adopting a clear risk management strategy, managers can handle risks in a way that makes sense to regulators, investors, as well as customers.
Planning to incorporate new technologies for risk management in your organisation? Connect with eKutumb for technology solutions, consulting and services today!
Author: Kishore Kapoor
Kishore Kapoor an industry veteran of 31 years in global banking technology. A Founder & CEO of eKutumb.com – World’s first marketplace for enterprise software delivery and consulting business by creating value for all of industry stakeholders involved (customers, partners, individuals and investors) through a disruptive and trans-formative approach of doing business.