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FutureRiskMinds

Aligning Risk Management with Creating Shareholder Value

Posted by on 22 November 2017
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The FFuture riskutureRiskMinds series has featured several up and coming risk managers as they detail how they see the future of risk turning out. Today, Franky Mui, CFA at the Federal Reserve Bank of New York gives their take. 

The views presented here are my own and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System. 

Risk Management and Strategy

As industry wide banking revenue remains challenging against a lower growth macroeconomic environment, banks may curtail risk management staffing levels to manage earnings through reducing expenses. It is unlikely that short-term expense management will increase long-term shareholder value. This was particularly evident with mortgage related losses suffered by banks shortly after the US housing declines in 2008. Increasing shareholder value and investing in appropriate levels of risk management are not mutually exclusive. Strategies that incorporate risk management considerations may identify sustainable opportunities that create shareholder value in the long-term, and/or avoid detrimental decisions.

Banks must explicitly link risk management practices and policies directly to their strategy to develop stronger business practices. Furthermore, risk management practices must keep pace with technological innovations that disrupt traditional business models. For example, banks may consider a range of financial projections before engaging in the robo-advising business. While the range of financial projections may exceed the hurdle rate, the bank may not prioritize managing risk in the new business. New or emerging risks such as fraudulent activities and reputational risks associated with robo-advising must be identified and accounted for. A comprehensive risk management framework can help to determine compensating controls to monitor, manage and price these risks. The implementation of such a comprehensive framework can help senior management make better informed decisions.

Increasing shareholder value and investing in appropriate levels of risk management are not mutually exclusive.

Banks with weaker practices may involve risk management late in the strategic planning process and thus overestimate growth. For example, the robo-advising algorithm used for investment allocation may fail to consider customer life events. This oversight may lead to investment suitability issues and or larger reputational issues. In a worse-case scenario, banks with insufficient risk management resources results in a competitive disadvantage and reducing shareholder value. For example, banks with fewer credit officers may require a longer time to update lending policies from an economic downturn leading to substandard underwriting standards.

Risk Management Career Path

Risk management stature has increased significantly since the US housing crisis. To attract and retain talent risk management personnel, banks have increased compensation and highlighted the value of the profession. However, risk management often has a narrowly defined career path. Career mobility is generally limited to within the risk organization. To attract a sustainable pool of risk management personnel, banks and senior management should support a broader path instead of solely focusing on stature. Mobility of risk management personnel throughout the organization would also support a stronger alignment of risk management and strategy.

All the key figures in risk management. In one place at one time. RiskMinds International >>

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