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Risk Management in Banking: Introducing Changes

Only 46% of banks are confident that their company has adequate risk management tools and processes, and that management follows risk management recommendations, as found by a recent Tower Watson survey. This article shows how to refine risk management mechanism and maintain risk management culture on a high level.

Risk managers are treated as an unavoidable evil. Instead, they should be seen as a strategic asset. This implies investing into human resources, training and technology to extend risk management capabilities.

Motivational & bonuses systems mostly support a gambling approach as opposed to rigorous analysis and focused strategy. As a consequence, risk management is second order function in banks, it is lacking resources and independence and it is armed with checklists and traditional paper-based or spreadsheet risk solutions.

This situation is intensified by recent events in the banking industry. Banking jobs start losing attractiveness. Fewer candidates in the job market see risk manager positions as a lucrative and prestigious career. In the face of severe regulatory control more professionals prefer shadow banking to put their creativity to a more profitable use.

We suggest that executive management in banks take the following steps of taking risk management for  to a higher level:

  1. Achieve organisational awareness of the need for changes in risk management and ensure support from every department.
  2. Develop a strategy of implementing new approaches. Brainstorm for new motivational system, research appropriate tools and services, evaluate human resources.
  3. Implement changes in procedures and processes. Establish motivational system and set up technology frameworks.
  4. Constantly evaluate and adjust quality of the new risk management culture in the organisation.

Banks must be mindful of the risk management approach throughout the organization. Otherwise, even the most robust growth strategy can hurt portfolio quality and cause a rise in problematic assets.

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Comments: (3)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 16 August, 2012, 10:07Be the first to give this comment the thumbs up 0 likes

The stature of the risk management function will automatically rise if its contribution to bolstering a bank's short- and long-term revenues and profits can be illustrated with a few case studies. Without this, it may unfortunately remain unavoidable that "Risk managers are treated as an unavoidable evil".

A Finextra member
A Finextra member 16 August, 2012, 13:06Be the first to give this comment the thumbs up 0 likes

Thanks for your comment, Ketharaman! This is so true.

To gain better support from executives risk managers must to shift their focus from risk to profit. They need to formulate their conclusions in a different way: speak in terms of maximizing profits instead of striving to minimize losses.

Often management does not pay much attention to increase in profits due to smart risk management, but focus on how much losses could have been avoided. This reminds me of Romans who had their bridge architects standing right underneath the structure when the supports were removed... 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 16 August, 2012, 14:16Be the first to give this comment the thumbs up 0 likes

@AnnaZ:

I heard the expression "anti marketing trifecta" yesterday in the context of how difficult it is to market a product / service that advocates prevention, isn't a fun topic and calls for a change from regular behavior.

It just struck me that, in its present form, risk management seems to exhibit these three traits: The first trait is obvious. The second one is at least true among executives. The third trait is strongly indicated by the following attributes of risk management: (a) It advocates executives to be cautious whereas most of them tend to believe that "it will never happen to me" (b) It uses analytics (OLAP) whereas regular business is fueled by transactions (OLTP). 

To break out of the anti marketing trifecta, risk management could try to reposition itself as a cure instead of prevention. Some suggestions: (a) How to avoid appearing on the 6 o'clock news? (b) How to get away without paying that fine? Just joking!

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This post is from a series of posts in the group:

Financial Risk Management

This network brings together professionals involved in the oversight and management of their company's financial risks and exposures as well as solution vendors, in order to discuss risk issues including interest rate risk, foreign exchange risk and commodity price risk, among others.


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