The core business of a bank is to manage their credit risks well while generating profits through different products & services. Losing sight on the requirement to manage credit risks well can lead to unwanted events even to the magnitude of the economic downturn as we saw in 2007-08 credit crunch & recession. If so, how do banks believe they are doing in this elementary aspect of their business? Would it be ok to agree that there is fundamentally no change in the risk management framework that was before the downturn in 2007-08 and now. What were the issues in that framework that persists even today?
Risk function is still the same. It is seen more as a hindrance than a business enabler. It lacks the value addition it is capable of making towards business decisions. Often the risk experts express the risk issues in a language that are difficult for other functions to understand. At the same time, the receiving function does not make adequate efforts to understand the details of the risk truly and ignores attempting to consider the impact of the risk that it may have. This lack of coupling between risk and other functions restricts effective performance, growth and sustainability.
In risk management, we often find the application of multiple tools and sophistication for monitoring activities, but in the absence of an effective risk management framework and mechanisms, people fail to identify, monitor and quantify risks in the real-time to provide the right level of attention and timely action needed to contain the risk.
To make the risk management effective policies and procedures must be developed by risk experts who have the training and experience for their specific countries, areas and client mix. It is then essential that the front line officers use those tools and processes to guide their daily interactions with customers that leave no ambiguity for them to understand what the bank can offer. In the absence of this, it may lead to decision making by the front line officers without adequate risk focus leaving possibilities for horrific consequences. But to make this framework work, it is essential to have risk quantification done accurately and adequately across the bank.
With growing complexities in financial instruments that promise above-average returns, they are often offered without having adequate knowledge of the potential downsides in dealing with them. It is key that a consistent and rigorous assessment of risk and quantification of the net benefits of appropriately dealing with the risk is done beforehand.
Prudent risk management is the cornerstone to the success of the business. Risk management is everyone’s responsibility, not just the risk department’s. So it needs a culture that has at the core a focus on risk management throughout the organisation from top leaders to the people working on the ground. Unfortunately, there is a significant shift from this in the prevailing culture in banks. This needs a change across the industry. So now how to build such a culture?
At SEEM our application “Compliance by Design” that will be used across the bank & it’s geographies will enable more accurate measurement of the impact of the risk. With the latest adoption of Machine Learning, it will transform the way analysis and risk modelling will be done. The predictive analytics using Machine Learning will give a better forecast. It will remove human biases that are highly prevalent in the risk management function and lead to more accurate decisions. Thus quantification of the risk, that is arrived at by combining accurate measurement of the impact of the risk and the probability of occurrence of that risk, will become more accurate and adequate. This risk information will be available at a discrete level in the application that can be easily rolled up to various levels. This will enable the sharing of required risk information with the decision makers at different levels of the bank, including senior management in a transparent manner. This easy availability of risk data in a transparent way that can be understood by people across the organisation in a consistent manner will change the way decisions are made. It will lead to a shift in culture that will become risk-focused in an authentic way.
The risk management framework will become effective in delivering results when risk data is available in an accurate and discrete way at different levels across the organisation.