The Time is Now for Enterprise Risk Management
Risk is an inevitable part of banking. Essentially, successful banking practice equates to successful management of different types and severities of risk. But in this generation's increasingly complex financial services environment, the nature and degree of risk to which all financial institutions are exposed - no matter their size, place, or business strategy - have multiplied many times over.
While regulators acknowledge that different institutions face different types of risk, depending on their business strategy, size, complexity of operations and other factors, they still emphasize that all financial institutions must develop a comprehensive risk assessment and management program. In fact, these risk management programs - and their effectiveness -- will be specifically evaluated during supervisory examinations.
To aid financial institutions in developing programs to assess and manage risk, regulators enumerated categories of exposures common to modern financial institutions, including strategic risk, credit risk, interest rate risk, liquidity risk, market risk, legal and reputation risk, compliance risk and operational risk. In addition to these general categories, regulators specifically require risk management programs to address technology and information security risks and the risks associated with the use of outsourced technology and other vendors.
Why has there been a surge in both risks and risk-taking among financial institutions in every size category? Here are just a few reasons:
The Gramm-Leach-Bliley financial modernization law opened the door to new and usually unfamiliar business lines for financial institutions, such as insurance agencies, finance companies and pay-day loan subsidiaries.
Financial products are more complex and increasingly include interest options, such as floors, caps and "bump-up" options.
Net interest margin compression has intensified over the past two years as rates declined, causing some financial institutions to take ever greater risk in the loan portfolio. Now, with some uncertainty which direction rates are going to go, many financial institutions are unsure of whether they are at greater risk than before.
Competition, particularly from non-traditional entities, and profit pressures have increased, resulting in greater risk-taking as financial institutions wrestle over marginal credits.
Non-maturity and short-term deposits have increased significantly as equity prices have fallen, increasing liquidity and interest rate risks.
Financial institutions are the targets of increasingly sophisticated crime, including international money laundering schemes and more traditional crime, such as check fraud and bank robbery.
Employees have been accorded numerous statutory and regulatory rights enforced by the courts.
Customers possess numerous rights, including the right to information privacy.
Technology has altered the risk equation, mitigating some risks and adding new ones.
To be sure, there is some degree of risk in just about everything a financial institution does. In today's risk environment, an enterprise-wide risk management plan that effectively identifies and assesses the potential impact of risks, provides appropriate tools and methods for monitoring risk, and employs effective risk control strategies is a necessary element of any responsible management structure.
Brintech provides financial services organizations with increased profitability and efficiency, ROI maximization of technology investments and improved regulatory review performance. These results are achieved through management consulting and advisory services in the areas of Financial and Operational Performance Enhancement; Risk Management; Strategic Planning; and Technology Selection, Management and Planning. Contact John Matheny at Brintech 800-929-2746 or at jmatheny@brintech.com or visit http://www.brintech.com .
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