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Are you effectively managing your organisation' risk?
The world's banking fraternity is facing major challenges in an economic climate which is highly volatile and buoyant within a competitive landscape. European banks are fighting hard to maintain profitability, while Japan slowly and steadily grows, albeit through gross corrections in world economies. Emerging markets are still being hammered as the shift towards commodities grows. All the while US banks have to field strong political sentiment. All this said, banks need to embrace new times and leave behind the old-fashioned practices of operating with high costs, minimal price competition or innovation, and mediocre customer service.
But no change is without risk, even should this be calculated. While financial institutions the world over have been the first of the industries to embrace true risk management, there has been some confusion with drawing the line between purely adhering to compliance issues, and better managing risk. Says Andre Zitzke, solutions specialist at SAS Institute South Africa: "While the two are inextricably linked, there are some parallels between operational risk and risk associated with compliance issues. Simply not adhering to compliance legislation is a crime, and naturally there is a risk associated with that, as operational risk can not only affect the bottom line, but hinder the road towards ultimate compliance."
Staying Competitive
Staying competitive in a global marketplace is key to financial institutions, as they have to ensure that they gear technology, Harry Pretorius, business development manager risk intelligence, SAS Institute SA customer facing practices and services to embrace a new era, all the while ensuring that each new service, solution and offering falls in line with compliance best practices.
"Risk intelligence is an important part of any company's business, but few embrace it. In a global study of more than 250 financial institutions and regulators, it was indicated that one-fifth of organisations still have no formal operational risk programs in place, despite the advancing regulatory compliance schedule associated with the New Basel Capital Accord, or Basel II," says Harry Pretorius, Business Development Manager Risk Intelligence at SAS Institute SA.
"While these figures are rapidly correcting themselves as more and more financial institutions embrace risk at a compliance and operational level, the study conducted by the Risk Waters Group and SAS clearly identified the credit and operational risk priorities for financial services firms," adds Pretorius. "The initial findings revealed that 19 percent had not yet identified the best organisational framework for addressing operational risk. These companies cite difficulties in collating clean data and poor awareness among staff as major obstacles, despite average reported losses of $18.8 million per year."
But a blanket risk solution is not the final answer, but a step in the right direction. This often proves daunting to an institution that already spend an enormous amount of money on technology solutions to improve the way in which it can service its customers. Banks the world over have myriads of data, data which is critical to survival and data which needs to be treated with great sensitivity. When embracing a consistent, forward-looking view of risk across an enterprise, this is primarily achieved from a central risk repository and a portfolio of risk analytic and reporting capabilities, ensuring that a comprehensive, 360-degree view of an organisation's risk activities is always available, from data integration to final risk reporting.
Understanding Risk
"True risk management should in theory explore strategies to assess your organisation's susceptibility to risk, and minimise adverse impacts of operational risk, market risk and credit risk on resources, earnings and cash flows through risk analysis," states Zitzke. "The next step is ensuring that risk can be treated in the same way as any other business process, and can be reported on. There is no point in gearing towards being more competitive, ensuring you adhere to international regulatory compliance, and become more customer facing if you are unable to report on or manage the impact of this."
"It's all about choosing the right partner. Selecting technology for technology's sake is not going to get you any closer to better risk management principles," he adds.
Companies need to assess the risk in their organisation before leaping head first into a risk programme or knee jerking a technology solution. In the instance of a financial services organisation, government regulatory compliance and credit risk are possibly the two main areas which need to be drilled down into and established as a baseline. However each industry is different, for example manufacturing and industrial, where operational risk such as supply chain risk may be more fundamental, as opposed to investment houses and fund managers, where market risk is top on the agenda as trading trends and market supply might be the biggest indictors.
No matter the industry, enterprise-wide risk assessment is critical to the effective management of processes, performance and even people.
The four pillars of risk management are identified as such:
- Risk avoidance
- Risk reduction
- Risk retention
- Risk transfer
Creating the right environment
Says Pretorius: "Acknowledging that your organisation may fall victim to risk, is at risk or needs a risk strategy is not enough. While consultants can mull over reams of paperwork to demonstrate risk, you need the systems in place to be able to track, monitor and manage risk, operational or otherwise, due to volumes and time to market."
"Ensuring that you are able to filter the data within your organisation, and then crunch it into useable information requires a technology solution that can penetrate all of the existing systems in your enterprise," he adds. "The biggest flaw in the current thinking is that you need to uproot and overhaul the systems you have in place. A forklift upgrade of every system in your company is not necessary in order to execute a proper ERM (Enterprise Risk Management) solution or project. If the data you have is solid, and can be cleansed in order to be evaluated, half the battle is won."
The new risk revolution dictates that you know every nook and cranny of your business and are able to report on this in an instant. If in life knowledge is power, it can then be said that in risk information is king.
The bottom line
While compliance issues are driving the ERM message the world over, the business message is possibly where the biggest benefits of an ERM strategy stem from. Such benefits include reduced losses, optimised allocation of economic and regulatory capital, protection against loss of reputation, improved performance management, improved selection of clients according to risk profile and improved pricing of products. These benefits go hand in hand with greater levels of compliance, and together can strengthen an organisation from all aspects.
"ERM can be applied to all areas of risk at any institution. While financial institutions around the globe tout improved credit risk management as a priority, and as the most important factor in contributing to economic gain, areas such as improved market risk management and improved operational risk management are also key factors to consider," ends Zitzke.
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