With the digital revolution we are observing today, the world is changing at a much faster rate than before. Economies and industries are constantly disrupted, with new ways of doing business constantly being written. The financial industry is no different. As a result, the risk landscape has been evolving, with traditional economic risks giving way to more pressing concerns in environmental, geopolitical and societal risks. Risks are also becoming more interconnected, diverse and complex, making it difficult to contain, predict or potentially manage. This changing landscape has brought about new and emerging risks, and these have driven the need for changes in risk management in financial institutions.
In particular, we see four key trends shaping risk management of financial institutions today, and in the future, and how financial institutions need to react to these trends:
Trend 1: Deepening and Wider Regulations
- Need to build more robust regulatory and stakeholder management capabilities in managing constant changes of regulations.
- Ensure financial, non-financial and compliance considerations to be on top of mind prior to formulating any business strategies.
Trend 2: Technology and Advanced Analytics
- Innovate and enhance existing risk management analytics by leveraging big data and machine learning capabilities for better and faster risk decisions at lower costs.
Trend 3: Changing and Rising Customer Expectations
- Work closely with businesses and operations to provide highly customised solutions to match changing customers’ profiles and expectations.
Trend 4: Pressure to Optimise Costs
- Explore cost-savings opportunities via simplification, standardisation, digitisation and automation or leveraging on third parties to perform operational activities, which may also afford opportunities to reduce risk.
Risk management and risk professionals need to adapt to this ‘New Normal’. To prepare for this future, risk management needs to focus on the following:
Risk management needs to collaborate more closely with the business and other functions, such as strategic planners, and play a more influencing role in running the financial institution. Traditional focus on portfolio management will need to evolve to shaping the balance sheet and optimising capital.
Risk management needs to become agile and respond faster to the changing world. Being prepared will also be key to ensure we are prepared to face the ‘known unknowns’ as well as the ‘unknown unknowns’.
Intelligence and Insights
Risk management needs to develop better analytical capabilities and leverage technology to enable us to make more informed and faster decisions.
Capacities and Capabilities
Risk management needs to have better intelligence and insights, and hence internal capabilities need to be enhanced. Manual processes should be digitised, specifically core risk, credit and compliance processes. In addition, to start looking into de-biasing decisions, full automation of decisions and processes should be done to minimise manual interventions. The talent pool would also need to be developed to be equipped with superior and strategic capabilities.
Culture and Values
Risk management needs to continue to be a strong advocate of corporate values and principles that are key to having a robust risk culture. A strong risk culture across the organisation will help in ensuring risk management becomes part of the daily job of all employees.
The risk management function is already changing and is expected to look decidedly different in the near future. With these evolving roles, it is no surprise that risk management will become the competitive advantage among financial institutions and hence even more invaluable.
Dr. John Lee is the Group Chief Risk Officer (GCRO) of Maybank Group, one of the largest banking group in ASEAN. He will be giving his opinion on the future of risk management at the RiskMinds Asia event this October.
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