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By M. Isi Eromosele
In an uncertain world, the financial industry has stepped up
its compliance regulations dramatically. So have
individual governments. The cost of failure
is very high. The spotlight has fallen on the adoption of effective risk
management practices.
Where credit and operational risks have always been
traditional areas of focus, regulatory and reputation risks have come to the
fore as potentially more damaging to financial institutions.
Financial institutions looking to implement an effective
enterprise risk management system should first ensure that basic elements, which
includes internal control policies, methodologies and infrastructure are in
place. This will determine their ability to integrate all risk components down
to the transactional level.
In addition, vulnerability to specific risks should be
weighed alongside the probability of their occurrence. Responses would vary
from merely tracking a risk and keeping it on the radar screen, to identifying
mission-critical risks that would have the greatest adverse impact on the
organization.
There are challenges involved in fostering a culture of risk
awareness and getting management buy-in to increase risk budgets at financial
institutions. After effectively centralizing their risk management functions, a
critical success factor for financial institutions is to successfully position
risk as a business driver. For a financial institution to effectively adopt a
risk culture, supervisors will have to take responsibility and be accountable.
It is encouraging to note that, for the most part, financial
institutions across global regions have taken a proactive stance towards risk assessment as
they continue to plug the perceived gaps in their risk controls. There is ample
evidence that regulatory and compliance issues have become top-of-mind for top management.
Risk officers, who are becoming increasingly empowered as a
result, would do well to continue driving deeper engagements across various
business units, which should in turn manage and maintain the risk they assume.
Many banks do not have extensive historical data and suffer
from disparate systems, manual processes and missing or incomplete customer data. Unfortunately,
risk analysis depends on a solid data foundation and financial institutions
need to enhance the capture of robust data, reinforce data ownership rules and
establish ongoing processes to track data quality.
Financial institutions can look to supplement internal data
with external sources, either by establishing country data bureaus so that a
critical mass of quality data can be developed and shared by industry participants
or simply by purchasing vendor-based models.
Financial institutions are advised to utilize in-house
development for proprietary risk models that would give them a competitive edge, while
purchasing vendor-based applications for readily available and well-established
solutions.
When purchasing such off-the shelf solutions, IT teams
should verify that short-listed candidates offer risk products that effectively
cover the organization’s existing portfolio, accommodate future updates and are
basically in synch with the business vision.
M. Isi Eromosele is
the President | Chief Executive Officer | Executive Creative Director of Oseme
Group - Oseme Creative | Oseme Consulting | Oseme Finance
Copyright Control ©
2012 Oseme Group
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