The Point

The old ways of managing risk are becoming obsolete, due in large part to the continuing impact of the recent economic downturn – an environment marked by reduced spending, low interest rates and increased pressure to grow profitability. In this challenging operating environment, strategic risk management provides a real-time, comprehensive view of risk.

Most legacy risk management solutions focus on specific risks and regulatory requirements. This makes it difficult to quantify existing and emerging risks – and to understand the complex relationships among those risks.

For example, what is the likely impact of reputational risk on capital and liquidity – or the impact of rising interest rates on income, credit and liquidity? What is the relationship between fraud or money laundering and credit risk – and the pressing risks associated with the implementation of new strategies?

With no clear view of interconnected risks across the business, the answers to these and other risk-related questions remain a mystery for many institutions. This makes it difficult to refine and optimize strategies to increase performance, leverage a competitive advantage and meet growth targets.

Legacy risk management solutions can also negatively impact regulatory compliance, especially as new requirements emerge for stress testing institutional strategies across a range of potential market scenarios. In particular, the inability to understand all of the risks facing an institution may make accurate risk assessments – and regulatory compliance – impossible to achieve.

All of these challenges can be daunting for financial institution personnel, who may lack the specialized data integration and analytics skills needed to successfully implement strategic risk management. This is not only the case for small institutions, typically constrained by budgets and staff, but also for departments in large financial institutions, which traditionally operate independently with very little support for cross-departmental data sharing or decision making.

Strategic Risk Management Requirements

The concept of a streamlined approach to strategic risk management is simple: 

1. Consider all types of risks that could potentially impact the institution
2. Understand the relationships between those risks and proactively manage risk to effectively risk-adjust strategies and optimize delivery
3. Take a forward-looking approach to risk management and stress test strategies against a range of possible market scenarios

This approach increases an institution's ability to predict the risk/return tradeoff associated with new strategies, as well as their potential impact on capital, liquidity, compliance and general institutional health to support sustainable growth and protect stakeholders.

Supporting Sustainable Growth

All types and sizes of institutions can implement strategic risk management and likely achieve significant performance improvements.  As a best practice, strategic risk management starts with enterprise performance management, which helps institutions develop strategies to effectively balance risks with returns, improve business performance and support sustainable growth.

Leading enterprise performance management systems support an integrated suite of performance management technologies. The tools analyze the financial health of an institution and assess how interrelated risks could impact future success. All financial risks are analyzed in terms of key factors that drive institutional success, from growth and profitability to operational efficiency and the effective deployment of capital.

Strategic risk management enables institutions to design and deliver strategies and financial plans that are properly risk-adjusted in order to protect assets, increase performance and competitive advantage, and maximize value for stakeholders and customers long term. This approach provides a clear view of operational and financial risks – and their potential impact on capital and liquidity.

Interested in learning more? Read Strategic Risk Management Puts Sustainable Growth in Reach, a new Fiserv white paper.