Best Practices for Implementing an Effective Operational Risk Management Program for Financial Institutions

Banks and other financial institutions face a slew of risk management challenges, many of which are in-built and inescapable components of their core business model. Unfortunately, this means that there are many threats that can never be fully neutralized and even more vulnerabilities that are impossible to eliminate. What’s more, the financial space is one of the most highly targeted amongst criminals and cyber criminals alike, adding to the complex dynamic that is risk management. Oh, and don’t forget those legal and regulatory compliance-related vulnerabilities. The financial sector is one of the most highly-regulated business niches in existence. 

The need for a well-developed operational risk management program is crystal clear. In fact, this sort of program is essential if you expect to achieve any modicum of success in your bank’s risk mitigation efforts. To maximize your chances of success, you’ll need to follow a few best practices for implementing an effective operational risk management program for your financial institution. 

Establishing Operational Risk Management Program Leadership

You’ll need a small group of leaders to spearhead your financial institution’s operational risk management program. Ideally, there should be a fair degree of overlap between the members of this leadership group and your risk management task force. This way, you can be sure to address current concerns and threats with the participants of your risk management program. Your program must address current issues so they’re up-to-date on today’s most pressing challenges and pain points. 

Your leadership should be diverse, representing all divisions and departments of your organization. This group will ensure that the program aligns with the bank’s risk mitigation efforts, while simultaneously architecting the program so that participants are educated on the best practices and processes that will serve to minimize risks. 

All of the bank’s employees should take part in the training component of your operational risk management program, although the lessons may differ according to an individual’s role within the organization. In many cases, it can be beneficial to bring in a third-party educator to develop the training program, design webinars and perform the actual training sessions and/or lectures. 

Remember that a training program will pull employees away from their normal everyday work tasks, so you must account for this in terms of scheduling. Ideally, staff should take part in risk management training on a regular basis, with lessons or webinars held weekly or biweekly.

An Emphasis on Process for Operational Risk Management Programs

The process should be a point of emphasis for any operational risk management program. It’s our workflows and processes that open the door to risk factors and threats, Staff need to understand this point. By patching up these holes, we can effectively mitigate operational risk. To achieve this goal, we must evaluate processes and streamline the steps in a way that reduces vulnerability. Involve the individuals who actually perform these processes and take a collaborative approach to arrive at a refined, efficient, and low-risk version of the process in question. 

The right processes and standardized protocols will result in uniformity and consistency that can be extremely effective for operational risk mitigation. Take some time to educate employees about how and why these processes contribute to the financial institution’s risk mitigation efforts. Also, remember to take the time to provide training as you roll out new processes and protocols. This way, you can ensure that everyone is on the same page and consistently following the same steps to get the job done in a way that also minimizes risk. 

Addressing Regulatory Compliance and a Financial Institution’s Operational Risk Management Program

Regulatory compliance accounts for a big piece of the risk management pie for a financial institution. Therefore, regulatory compliance must be a large part of what you address within your operational risk management program. Financial institutions are subject to some of the most stringent regulatory oversight of any industry and some employees don’t fully appreciate the degree to which regulatory compliance burdens shape the bank’s operations and policies. 

By nature, many of the regulatory compliance requirements also bring about risk management benefits. For example, there are multiple regulatory oversight groups that call for a relatively high level of cybersecurity and encryption. A bank that achieves compliance reduces its risk stemming from the potential for non-compliance and they also see benefits from the security measures that they’ve implemented in order to achieve that compliance in the first place. It’s important that staff understand this relationship because it highlights how essential it is to follow the set processes and protocols.

The reality is that regulatory compliance is at the root of some serious risk management issues, especially when it comes to operational risk management. A bank could face hundreds of millions of dollars in fines if employees use a consumer-grade messaging app to communicate with clients. Something as seemingly inconsequential as your choice in messaging app can actually have devastating — and extremely costly — risk management consequences. It is critical that your employees understand the regulatory compliance issues that lay just below the surface of their everyday duties and tasks. 

Regulatory compliance risk management software can prove to be an invaluable tool thanks to the complexity of this discipline. It’s very effective for pinpointing new regulatory compliance burdens, identifying areas of possible non-compliance, and planning a response to address compliance issues that will inevitably arise. These platforms also include tools for monitoring your compliance over the long term and alerts for new laws and regulations that may affect your financial institution. 

Continually Monitoring the Operational Risk Management Landscape

The operational risk management landscape is constantly changing and evolving. New risks arise. The dynamics surrounding an existing risk may change. A long-confronted risk may suddenly become irrelevant. To be effective, your operational risk management program must keep pace with this evolution by performing a few key tasks. 

• Monitor for changes in risk management threats and vulnerabilities.
• Identify and assess new risks. 
• Identify changes to existing risk factors. 
• Identify new areas of vulnerability. 
• Re-prioritize risk mitigation priorities. 
• Adjust your risk mitigation plan to accommodate these changes. 

To perform these tasks, your program’s leadership group or task force must meet regularly. You must be proactive, not solely reactive. Yes, some of the work will be reactive in nature, responding to issues that are already in place. But at the end of the day, a proactive stance is what will allow you to get ahead. 

The Right Operational Risk Management Software Platform

Managing risk and deploying an effective risk mitigation program for your organization is no small feat, but the right technology can bolster your efforts and increase your overall efficacy. Operational risk management software platforms include a host of tools, including the following. 

• Monitoring and alerts for changes in regulatory compliance burdens and legislation.
• Evaluation and assessment tools for threats and vulnerabilities
• Prioritization framework for risk factors.
• Project management-type tools for formulating an action plan, collaborating on tasks, and monitoring progress on these tasks.
• Task tracking tools to monitor for ongoing compliance and risk mitigation.
• Training modules for educating staff. 
• Background check, reputation monitoring, and third-party risk management (TPRM) tools.

These risk management software systems can include a wide variety of features, designed to accommodate the financial sector and a variety of other industries. These platforms are very effective for centralizing and formalizing your financial institution’s operational risk management program — all while making your efforts more fruitful. 

At iTech, we specialize in risk management software and other technology designed to drive your financial institution’s risk mitigation program forward. We invite you to contact our team today to begin a dialogue on how we can help you leverage today’s best practices for implementing an effective operational risk management program for your financial institution.