The 2007-08 global financial crisis underlined the importance of comprehensive and sound risk governance, especially in financial institutions. The global recession was an indication that the financial sector had failed to handle its core business (risk management). If banks had attended to risk management prudently, there wouldn’t have been the flood of inexpensive short-term interest rate loans, wave of personal bankruptcies and countless home foreclosures.
Today, banks are making dramatic changes to their risk management. In fact, the pace isn’t slowing down anytime soon. The current trends are afoot to suggest that in the coming decade; more sweeping changes will characterise risk management.
How can financial institutions manage their risk prudently? The following are the top 3 best practices for managing risk in the financial sector:
#1: Categorise and Discuss Risk in a Simple Language
The last thing you want as an institution is to cause untold misunderstanding and confusion when explaining strategies to manage risk to employees. Consequently, risk experts must translate risk issues into terms and a language that every interested party can understand. All other functions within the company are under obligation to not only understand but also implement whatever is being taught by the risk manager.
#2: Apply Risk Management across the Whole Organization
Senior financial managers should centralise all major processes around risk. Once they do that, they need to decentralise the decision making process down to the branch levels. These safeguards work perfect against unwanted risk. Risk management is effective when applied consistently across an organization where risk experts develop procedures and policies.
#3: Assess Risk Management and Quantify with Benefits and Costs
Rigorous and consistent assessment of risk and quantification of net benefits of the risk is crucial. Managers of financial institutions should quantify the risks of credit derivatives to understand the potential downsides and benefits of their strategy.
Risk management in a financial institution is not the responsibility of the risk department only. Senior managers must demonstrate to employees that effective risk management is one of the cornerstones to success.
Find out more about Fern Software solutions, click here to request for our brochures for free!