Magazine article The RMA Journal

THE FUTURE OF BANK RISK MANAGEMENT AND GOVERNANCE: TALENT, BIG DATA, AND DYNAMIC KRIs

Magazine article The RMA Journal

THE FUTURE OF BANK RISK MANAGEMENT AND GOVERNANCE: TALENT, BIG DATA, AND DYNAMIC KRIs

Article excerpt

Risk management and governance at banks is on the brink of massive changes that will have significant impacts on the financial services industry.

The driving force behind the change is a combination of three factors:

* The emergence of big data (1) as a practical tool for identifying risk.

* The continued recognition by bank executives and directors that banks must become more efficient and cost-effective.

* The changing nature of the workforce.

This article will examine key lessons learned, the spiraling challenges banks face in identifying risks, how technology will impact banking, and why dynamic key risk indicators will emerge as an important tool for bank boards. Four case studies will follow, as well as a view of the talent implications associated with the transformation of risk management.

Equifax: The Future Is Now

Equifax's discovery in the summer of 2017 that it had been hacked puts a spotlight on the future of bank risk management and governance. If you think the Equifax story is all about cyber and hacks, you may not be thinking about 21st century risk management in the right way.

On September 18, 2017, the Wall Street Journal ran a lengthy article, '"We've Been Breached': Inside the Equifax Hack." (2) Buried deep in the article was another story arguably at least as big as the loss of personal information for 143 million Americans.

Months before learning of the hack, a financial institution with a large merchant base and links to credit card networks got 12 calls over the course of a few weeks from customers seeking to change the deposit account number for their merchant transactions. In every case, the customers said the change was necessary because they had moved to a new bank. The 12 customers provided appropriate identification, including name, address, date of birth, and Social Security number.

Using advanced big-data analytics to recognize a seemingly imperceptible increase in telephone calls, this firms risk management system issued a fraud warning. Think about it: A mere 12 calls prompted the firm's risk managers to impose more stringent requirements on customers requesting a change in deposit account number.

Once the Equifax hack came to light, the firm's risk managers put two and two together and recognized that their prompt actions had prevented financial losses and potentially irreparable reputational damage. Just as important, their clients had dodged an event that was sure to inflict enormous personal anxiety and potential financial harm.

This story about 12 calls is a glimpse into the future of bank risk management and governance. It is a story about how risk management captures and relies on the velocity and volume discoverable by big data to create dynamic key risk indicators (KRIs) and key performance indicators (KPIs). And it is a story about how rapid identification of an emerging risk triggers an immediate tightening of controls and a reduction in risk tolerance.

Banking's No. 1 Risk Management Challenge

The Equifax case should send a clear message to bank risk executives and board risk committees. It reminds risk professionals how different 21st century risks are from the type of risks bank presidents and boards experienced 20 years ago. More importantly, Equifax's hack exposes the criticality of early risk identification.

But how difficult is timely risk identification?

In 2014, the Basel Committee on Banking Supervision released its findings from a confidential operational risk management survey of 60 global systemically important banks with headquarters in 20 nations. (3)

The survey posed 180 questions covering the spectrum of operational risk management. The findings determined that the top nine challenges facing the banks all centered on one theme: risk identification and assessment. Every other risk management challenge took a backseat to the imperative of timely and effective identification of emerging risk. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.