International Finance
Banking Magazine

Risk management techniques for financial services

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Modern project management techniques popular in the financial services sector lower risk, help develop new products and services, and improve client experiences

Banks and financial service providers are exposed to an expanding number of hazards due to increased digitalization. As a result, cybersecurity threats are rapidly growing. In addition, the breadth of legislation about specific industries is expanding as data privacy authorities step up enforcement. As a result, many of these risks are amplified in the financial services sector, significantly complicating financial organizations’ risk management and cybersecurity readiness.

Today, more than nearly any other industry, banks face challenges with risk management. However, emerging technologies have always influenced how financial institutions operate. For instance, according to the Deutsche Bundesbank, the German banking sector’s personnel has consistently decreased over the past 20 years. Still, total assets have climbed by nearly 50% during the same time. The constant use of technology has contributed significantly to this improvement in productivity.

However, because technology is increasingly influencing and altering banking business models and how people and businesses spend, save, borrow, and invest money, the effects of technological transformation have never been as dramatic as they are now. As a result, the banking sector is suddenly facing competition from businesses developing their financial systems, including media organizations, technological firms, and internet shops.

New players, new technology, and new threats

CB Insights reports that 27 fintech unicorns, or privately held businesses worth more than $1 billion, were formed by investors in 2020. In 2021, there were 157 new “unicorns,” and among the 500 unicorns with the highest market values were 70 financial businesses.

Most of these new competitors lack a banking license. Most of the time, they were experts in particular technical support or financial services, such as credit scoring, mobile payments, or cloud services. Since banks have started collaborating with startups and fintech companies, outsourcing has become an unstoppable trend in the banking industry. As with all other facets of digitization, their collaboration with fintech has presented banks with fresh, complicated concerns.

As the financial industry grows more digital, more data is handled, new technologies are used, risks increase, and institutions increasingly need to focus on cybersecurity and risk management. For example, according to information released by the European Commission at the end of 2020, the pandemic saw a 38% increase in cyberattacks against financial institutions.

Therefore, it is no longer sufficient to comply with the banking supervisory standards for IT and the minimum criteria for risk management (MaRisk) (BAIT). Banks cannot mitigate new risks by giving them equity and liquidity backing. Risks that are not financial must also be considered.

Banks must identify and consider threats such as terrorism, conflict, cybercrime, natural catastrophes, climate change, sanctions, and geopolitical upheavals while managing their risk. As a result, the risk and compliance operations will also require closer integration.

There are many issues with how banks implement risk management in this environment. Some critical questions to keep in mind are: How can you avoid having a server outage that lasts several hours and has significant financial repercussions? What dangers are involved when working with outside service providers, especially when outsourcing particular processes? How can you guard against hardware and software malfunctions? How can technical mistakes be avoided when configuring IT systems? How can the IT structure’s weak points be identified? How well-protected are the IT system’s interfaces? How can you prevent unauthorized access to enormous amounts of data? How do you stop employee deception and manipulation? What administrative rights are required for which employees? What expertise do the bank’s board and employees have in risk management? How should the risk from the changing climate be mitigated? How should we respond to conflict, raw resource shortages, and changes in global politics? What should one do in an emergency if an attacker renders the IT system useless?

Using legal requirements to support bank risk management

The European Commission unveiled a proposed Digital Operational Resilience Act to assist banks in creating a robust security posture, including a solid risk management system that can resist attacks of all kinds (DORA). This proposal is a component of the Digital Banking Package, a collection of policies that utilize digital finance’s innovation and competitive potential while reducing the associated risks.

The EU Commission claims that the Digital Finance Package includes a digital finance strategy for the EU financial industry, among other things, with the following goals: Bolster and further enhance the financial industry’s operational digital resilience. Always keep an eye on outside information and communication technology (ICT) service providers doing business with financial institutions. Financial institutions should carry out their responsibilities in this area in the future.

Germany passed the act to Strengthen Financial Market Integrity (FISG) in June 2021, and as a result, many financial regulations have been modified. The financial watchdog BaFin, among other things, has direct access to the businesses banks use to outsource crucial tasks and operations.

The core of bank risk management

Turning individual screws in light of the complex threat environment facing banks’ IT systems is insufficient. Risk management aims to make the financial organization more resistant to attacks from inside and outside. Digital resilience needs to keep getting better. Risk management in banks must be viewed as a business necessity that affects every employee and every technology advancement, including big data, cloud solutions, artificial intelligence, and robotic process automation, in addition to the IT departments of financial institutions.

Potential of automation & digitalization in bank risk management

Digital solutions will be used appropriately in risk management as the financial sector becomes more digitalized. However, up until now, this has not been the case. According to the 2021 report “From Crisis to Opportunity: Redefining Risk Management” from the Financial Times subsidiary Longitude, only 10% of banks have fully automated most of their risk management tasks. Only 6% of the risk modeling process has been entirely automated. Nevertheless, the research claims that the institutions driving this transition are already reaping strategic rewards. It includes, for instance, the capacity to produce data-driven insights more quickly and broadly in a market that is becoming more unpredictable.

The advantages of utilizing cutting-edge technologies for banking risk management are clear. Implementation, nevertheless, is not always straightforward. Therefore, investing in systems, tools, and improved analytics capabilities is vital. Big data, AI, and machine learning will be critical to enabling ability without considerable resources. Although such programs demand investment, they will pay off in improved data protection, reduced risk, and resilience against a constantly changing array of cyber threats.

Including risk management in agile project management

The rate of change in the financial services sector is accelerating. Institutions must discover ways to promptly and affordably provide clients with new services and improved experiences to stay competitive. Many people have used Agile project management to achieve this. However, the requirement for effective risk management still exists despite the urgency. Institutions should guarantee that risk management and controls are an inherent part of the process while expediting the development of new goods and solutions, which can be challenging for Agile projects.

Increasing demand for flexibility and speed

Institutions should alter how business units and the risk management function collaborate on projects and how the three lines of risk management defense interact with agile teams to expedite projects without raising the risk. They should ask these questions and find the following answers: How can risk management be integrated into an Agile project to mitigate risks and improve efficiency? Choice privileges. What decision-making authority should they grant to project participants, the three lines of defense for risk management, and particularly the business units? Talent. What organizational frameworks and risk management skill sets will we require for the three lines of defense risk governance model, and how should this model be implemented to integrate well with Agile projects? Tools and speedups. How can technology improve the capacity, competencies, and effectiveness of risk management? a plan for managing change.

Banks and other financial institutions will spearhead their digital transformation in the upcoming years. New business models brought upon by digitization inevitably carry new dangers. Banks must adapt quickly to new technology and take preventative measures as new threats materialize. The commercial opportunity presented by digital transformation will be enormous if consistent, effective risk management is used in conjunction with the business strategy.

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