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.