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Risk Management Strategies Used by Banks
The banking sector happens to be one of the most exciting spaces to operate in currently. The industry is facing a tremendous shift ranging from a variety of factors including stiff competition from FinTech start-ups, innovative offerings that are leading to industry wide shifts, changing business models, closer scrutiny on regulation and compliance, and disruptive technologies.
With 2020 becoming earmarked as a watershed moment in terms of cyber-attacks as well as IT disruption, security and privacy concerns have only continued to grow with regulatory and compliance requirements becoming more complex and demanding than ever. Disruptive product offerings are changing the way the industry operates more frequently. Convenience, security and impeccable, personalized customer service are becoming the norm and distinguishing yourself in terms of customer service is becoming more and more of an uphill task for most banks. Managed IT Services can help you navigate significant resource strain caused by the increased demands.
In short, the banking industry faces a myriad of challenges that can potentially only be addressed through evolving technologies and evolving policy frameworks to govern them. Despite the nature of the challenges facing the sector, many banks and financial institutions have found it difficult to transition completely from legacy systems and embrace digital transformation as an evolving process. The risks for lagging back far outweighs the pain of change.
From accidental system blackouts, operational failures, infrastructure and security challenges presented by the new remote work regime to highly sophisticated cyber-attacks including ransomware, distributed denial of service (DDoS) attacks, data breaches, other attacks launched using back door threats and supply chains – hackers have focused on the banking sector as a primary target. Most financial institutions have now understood that evolving with technological changes and challenges is the only way financial institutions can thrive in the current landscape. Without the requisite level of agility and anticipation in adapting to technical changes, even long-standing traditional institutions stand to lose out in sustaining customer interest and trust.
Reliance on New Technologies
Financial institutions and banks of all sizes have undergone tremendous operational changes, thanks to the pandemic. The extent of the changes can be guessed at with announcements like HSBC (Europe’s largest bank) planning to reduce office space by 40%. The need for banks to stay resilient and thrive in an increasingly competitive environment is to be continuously leaner, and more cost-effective. This means tremendous changes in the operational structure including opportunities for challenges and mistakes. Banks need to accommodate for effective change management in both processes and services in order to quickly adapt to changing circumstances. Most recent example of this can be found in the almost overnight shift to the remote work model during the pandemic. In the same vein, operational risk managers need to understand that managing banking risk responsibilities have now expanded far beyond limiting credit risks and implementing monitoring procedures for them. As banking operations rely heavily on adapting to new technologies and regulatory frameworks, risk management involves addressing all the risks associated with them.
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Leading Risks for Banks
Increasing Sophistication of Cyberattacks
Recent surveys of bank executives and banking experts report cybercrime as one of the top risk factors for banks. In order to meet the customer demands for convenience and instant service round the clock, many banks have overextended their infrastructure capabilities leading to an expansion of vulnerabilities in their networks. With customers becoming increasingly privacy sensitive, Banks can ill-afford the reputation damage that accompanies any loss of client information, service disruption, or compromises in the banking infrastructure. Cyberattacks have an inevitably negative impact on the organization’s bottom line, whether it’s through lost productivity and opportunities, the financial cost associated with navigating the impact of a breach, regulatory fines, or reputation loss that can sometimes be permanent. IT support 24/7 can help you implement an agile and proactive defense posture to counter the threats.
Operational risk managers also have to navigate concerns associated with conduct risks. These arise from potential inappropriate conduct such as misrepresentations about banking services and financial products that can give rise to fraud lawsuits and regulatory sanctions. The Consumer Financial Protection Bureau (CFPB) that came into effect after the 2008 financial crisis, works to continually inform consumers about abusive banking practices.
Keeping Up with Regulatory Expectations
In the aftermath of the crisis, regulatory compliance has evolved in complexity and extent dramatically. Regulatory fees relative to earnings and credit losses have also increased significantly. Banks are now subject to statutory requirements as per Basel’s risk-weighted capital requirements, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Financial Account Standards Board’s Current Expected Credit Loss (CECL), the Allowance for Loan and Lease Losses (ALLL), just to name a few. Complexities also arise from inconsistencies in overlapping regulations between different jurisdictions as transnational banking regulations, such as Basel III, put forth new bank capital requirements. Meeting all of these compliance requirements requires significant outlay in terms of time, effort and resources. Banks can also encourage significant costs arising from misinterpretation of new regulations, or simply, failure to comply.
The consequences and risks of non-compliance can be severe and banks need to institutionalize a culture of compliance with formalized compliance structures and systems. Technology can be a critical tool in identifying and minimizing compliance risks. Managed service providers can also help banks standardize processes, implement consistency in standard procedures, and stay ahead of evolving regulatory frameworks.
Final Thoughts: Biggest Risks Facing Banks Today
Even though financial organizations have always excelled at navigating and managing risks, the operational risks they face now far exceed financial considerations or market turmoil. Apart from managing fraught market and consumer scenarios, banks now need to stay ahead of increasingly complex cyber risks arising from threats such as identity theft and data breaches, gaps in operational policies or security infrastructure, consumer mismanagement, regulatory non-compliance risks and more. The only way to address these challenges and still remain competitive is through the implementation of the right technology and technology governance frameworks. IT consulting services have extensive resources on technologies to help you meet evolving compliance frameworks.
Nora Erspamer is the Director of Digital Marketing at New Charter Technologies, a group of companies specializing in 24/7 IT support services. She is an experienced marketer and sales strategist with a demonstrated history of working in various technology industries. Skilled in strategic campaign development, lead generation, and marketing automation software. Her blog can be found at https://newchartertech.com/blog/.