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Risks Faced by Banks in Today’s Financial Environment
Risks Faced by Banks in Today’s Financial Environment
In banking risks are defined as uncertainties and the possibility of future events exposing the bank to an unfavorable outcome and even endangering the bank’s stake in the market. Many factors have changed in the financial industry over recent years and with these changes have come increasing risks. Significant changes have included the advent of advanced technology; changing regulations; business model transformation and the appearance of new competitors offering alternative financial services including FinTech companies, start-ups etc.
With new players in the financial world the financial environment has become increasingly complex. With the changes in the finance world there is a need for changes in risk management procedures and systems. New players, new regulations, a global society, new technology and changing consumer needs have created new risks. As a result, risk factors need to be reassessed and the role of chief risk and compliance officers is more vital than ever before. Potential risks to banks need to be monitors and managed to preserve a safe environment for banks as they face today’s digital transformation.
Risks Facing Financial Institutions:
- Market Risk
- Potential loss due to a change in interest rates, dealt with by asset/liability management.
- Potential loss due to change in stock prices when banks accept equity against disbursing loans.
- Potential loss due to fluctuation in commodity prices caused by continuous variations in supply and demand. This affects banks when they hold commodities as part of their investment portfolio.
- Potential loss due to changing exchange rates when the value of the Bank’s assets or liabilities are effected by fluctuation of the exchange rate. This affects banks when dealing in multiple currencies.
Operational Risk
Failed or inadequate internal processes or external events can lead to operational risk of loss. All bank departments face the possibility of operational risk on a daily basis.
There is potential operational risk from human error or intervention.
Potential operational risk from failed IT; internal software or internal systems.
Operational risk can be caused by internal processes failing to transmit data or information accurately.
Cyber Security Risk
Banks are at risk from potential cyber security breaches; in fact, this is the most common IT risk in banking.
There is risk of failure to keep electronic information private, safe and not damaged, misused or stolen.
Cyber-security risks can come from internal or external factors and can be caused by people or technology.
Causes of Cyber-security risks can include missing transaction business controls; lack of user privilege segregation; weak password policies; poor anti-virus systems; lack of ongoing monitoring or weak server defense.
Cyber-security risks can be reduced by applying controls across all business divisions and ensuring no access permissions are unintentionally or mistakenly granted.
Risk of Legal or Regulatory Sanctions
Compliance risk can lead to material financial loss or loss of a bank’s reputation due to its failure to comply with codes of conduct; failure to comply with laws and regulations or self-regulatory standards.
Compliance risk can be mitigated by establishing an infrastructure to analyze and organize data to meet legal and regulatory standards.
Senior bank management must take the lead in formulating, communicating and enforcing compliance policies through all departments to minimize compliance risk.
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