Risk Management and the Role of Core Banking Systems

It’s all about future-proofing the bank’s risk and compliance. The recent credit crisis has underscored the importance of proactive risk mitigation for banks. Banks need to first effectively and efficiently identify the potential risks associated with each and every banking process and then measure the same. Every process, operation and service performed at the bank needs to run through the ‘X-Ray machine’ of the risk department so that every possible transactional risk becomes known. Doing so can mitigate risks well before they turn viral.

A sophisticated core banking system with: adequate risk controls embedded within; the ability to churn out consolidated risk-data in reports showing deviation in any banking process from the prescribed norm; the ability to represent data such that it can be audited; the capability to supervise over and above human supervision with automated trigger mechanisms for highlighting deviations; the “four eyes” concept; proper access and transaction controls; and a proper rule based engine with process orientation is the answer.

A core banking system with the capability to capture, classify, measure and report data and operational processes in accordance with most prescribed guidelines in its specific geography, is the ideal solution. Today the role of a core banking system is not just that of a transaction processing engine; it is the key repository of information to further analyze and detect risks. It is a single source of truth which is accessible by all stakeholders in a transparent way. Providing risk management capabilities as an embedded component of a core banking system will enable banks with a more effective and accurate view of risk across the enterprise. On the other hand, if a bank does not have a flexible, modern and optimized core banking system with proper risk controls, it could find it extremely difficult to function in a complex, high-risk, financial environment. So the critical drivers for core banking management are reinforced by the need for more disciplined risk management practices; rigorous regulatory compliance capabilities and oversight; and most critical of all, the strength and stability of the balance sheet.

That being said, the role of a bank’s risk department cannot be undermined. Most have existed as purely advisory units; it is now time for them to take on a more proactive role, and function hand in hand with the business. A risk culture pervading all levels of hierarchy; a strong internal audit procedure; and a strong IT system to monitor and mitigate business risks over and above what a human eye can detect, makes risk identification, ownership, control, measurement and reporting part of the DNA of a progressive bank. This is the only way to achieve sustained, stable and risk free growth.