The future of strategic risk management in financial services
The financial services industry is currently in a period of heightened change and uncertainty. Changing regulatory expectations and increasing geopolitical risk are shaping the external environment, while growing competition among banks, non-banks, and financial technology firms (FinTechs) is reshaping the competitive field.
As pressures mount on traditional sources of profitability, financial institutions are increasingly searching for new avenues for growth—developing more customer-centric service strategies and entering into “digital banking” through partnerships or ventures with FinTechs.
While failing to innovate in this environment may place financial institutions at a competitive disadvantage, doing so without aligning business strategies with sound risk management practices may also heighten strategic risks.
Recognizing the growing impact of strategic risks on financial institutions, regulators now expect institutions to have formalized processes to assess strategic risks.
Indeed, the future of risk will require risk functions to devote more focus to managing strategic risks, as the external and competitive environments become more volatile and uncertain, and internal operating models become more technologically-driven.
To start effectively managing strategic risks, financial institutions need to:
- Establish governance and ownership for strategic risk management
- Better integrate the stakeholders responsible for strategy and risk management
- Put in place risk review processes that allow for independent oversight and challenge of strategies, which are linked to risk appetite setting
- Train risk leaders in forward-looking risk management approaches; and
- Put in place frameworks to assess risk impacts on key business variables.