Effective risk management is vital for banks. It’s also an area that’s constantly evolving, meaning financial institutions need an adaptable approach that can meet the requirements of the modern industry.
India’s economy is expected to become the third largest in the world by 2030. But while banks are well placed to benefit from this soaring growth, they will also be the custodians of a rapidly changing financial landscape and thus are likely to be exposed to increased risks – both financial and operational.
Of course, banks and businesses need to accept a degree of risk to make profit. But just as risks are essential, so too is the need for effective risk management.
What is risk management in banking?
Banks face numerous risks, both from within their organisation and via external factors. Effective risk management is about being able to identify, track and measure these risks, as well as acting to mitigate them when necessary.
The key risks that banks deal with can be categorised as:
- business risk
- financial risk
- operational risk
- liquidity risk
- strategic risk, and
- technology/systems risk
Why do banks need to manage risk?
Banks need to ensure they are managing risks for obvious reasons, such as preventing loss, complying with regulations, protecting their reputation, and ensuring their survival.
But risk management failures can have a huge impact, not only on the businesses themselves but on wider society. Because of their importance to the global economy, banks are subject to strict regulation and face significant fines for risk failures.
How do banks manage risk?
In order to effectively manage risks, banks need to implement frameworks that detail the policies, procedures and responsibilities required. These policies need to be regularly reviewed and updated as the risk landscape continues to evolve.
Some banks choose to adopt industry-standard frameworks, such as COSO ERM or ISO 31000:2018, whereas others build bespoke frameworks.
A bank’s chief risk officer, heading up a risk management department, is responsible for overseeing the implementation of the framework and reporting to the board, chief executive, and the regulators.
Jobs in risk management
The ever-changing nature of the risk landscape makes working in risk management a challenging and exciting career option. Risk officers are responsible for identifying, assessing and mitigating risks, as well as reporting outcomes and, if necessary, reviewing protocols.
Risk officers need a broad skillset. If you’re thinking about a career in risk management, then of course you will need to have good analytical skills, be well organised and have excellent attention to detail. But in addition to these capabilities, you’ll also need to be a people person, with strong communication skills.
It is also important that you have strong values, resilience, and determination – senior risk officers may find they need to push back against colleagues when there are differences of opinion on taking on risk.
Paul Howard is a Risk Management Consultant and a faculty member at The London Institute of Banking & Finance’s Centre for Governance, Risk and Regulation.
“Engaging with the business to support their aspirations safely can be a fine balance on occasions,” he says. “You have to have to be an arbiter, ambassador and enforcer. In some instances, the skill can be having a good nose for what needs closer examination and what does not. It’s never boring.”