How Do You Manage Operational Risks in Banks?

Financial institutions such as banks, credit unions, and others in this business sector must manage a very complex and multi-faceted risk management landscape. Operational risk represents a major area of focus for bank leadership and financial institution policymakers, but the right technology can go a long way toward facilitating effective risk management in this business sector. 

What is Operational Risk in a Bank Setting? 

Threats and vulnerabilities abound, and operational risk is one of the four primary types of risk in the banking industry. 

• Credit risk refers to the risks that a bank or other financial institution incurs as they extend credit lines and provide loans to customers. There is always a risk that a customer may not repay a credit line or loan, which translates into what’s known as credit risk. 
• Market risk refers to the potential for losses arising from financial market changes that bring a negative impact. These can include unfavorable currency exchange rates and interest rates.
• Liquidity risk refers to the risks arising from a bank’s inability to meet its financial obligations. This can occur if funding sources suddenly dry up or if market conditions create a situation where the financial institution is unable to liquidate assets without major losses. 
• Operational risk refers to the risks that are rooted in a bank’s operational failures, flaws, or insufficiencies. These failures may be related to a bank’s systems, processes, policies and procedures, employees, technology, and even external events.

In addition, bank leaders must also manage more general risks, such as those associated with regulatory compliance, strategic risks, and reputation-related risks. The latter can be especially problematic for banks since a positive reputation is essential for success in the financial space. What’s more, regulatory compliance-related risks can cause degradation in a bank’s public image, which, in turn, damages the financial institution’s reputation. This illustrates how many forms of risk are interrelated and operational risks in banks remain a key point of concern because virtually every vulnerability or issue holds the potential to impact operations in some way, shape, or form.  

How Do You Manage Operational Risks in Banks 

Effective operational risk management requires close oversight in a wide breadth of areas and demands a well-architected risk management strategy. This risk management strategy must be developed through careful consideration of the bank’s unique threats and vulnerabilities. 

Risk management software platforms can play a critical role in dealing with this type of risk simply due to the far-reaching nature of operational risk vulnerabilities. Operational risks can impact virtually every area of a bank, from its employees, policies, and procedures, to its technology and external events that affect the bank, the financial markets, and the bank’s interests. 

These enterprise software systems promote effective operational risk management in several ways, but the key capability involves the facilitation of the following processes. 

Identifying operational risks and vulnerabilities – The first step to any form of risk management and mitigation involves a comprehensive evaluation process that allows you to identify all potential and existing risks and vulnerabilities. These problem areas may exist in many different areas, from the employee practices and processes that are used within the organization, to policies, procedures, and even the bank’s technology platforms. A risk management software system typically features tools, checklists, and other resources that allow you to pinpoint these problem areas and pain points. 

Assessing risks and vulnerabilities – Once you’ve identified the bank’s existing and potential risks, threats, and vulnerabilities, it’s time to evaluate the nature and severity of those issues. This allows bank leadership to prioritize the most severe and pressing operational risks so that they can be addressed ahead of issues that present a lesser threat of losses. This evaluation and prioritization is a very important part of an effective risk mitigation strategy. 

Developing an operational risk management plan – With a bank’s operational risks, vulnerabilities, and risk factors identified and evaluated, it’s time to develop an action plan. There must be a plan of action developed for each individual threat or risk, with a defined set of actionable steps that will lead to effective risk mitigation. 

Managing the operational risk response – Once you have an action plan in place with a defined course of action, you’ll need to assign tasks that allow you to execute that plan. The best risk management software platforms have project management-type features that allow you to assign tasks and collaborate with colleagues as you work on the tasks required to mitigate and resolve the operational risks confronting the financial institution. 

Monitoring for future operational risk factors – After the existing operational risks and potential vulnerabilities are addressed with a well-planned response, you’ll need to determine what measures are necessary to avoid a future recurrence. To achieve this, you must determine what warning signs are associated with each risk, threat, or vulnerability. Then, you must devise a plan for monitoring those warning signs. Ideally, your risk management software will feature tools that allow you to monitor potential problem areas, with alerts and notifications generated as issues arise.

In addition to these measures, many risk management software platforms offer useful tools such as checklists, a stream of the latest industry updates, and monitoring dashboards. The latter can be especially useful for managing technology-related operational risks — an area of vulnerability that represents a significant area of concern for modern companies in all industries simply due to the amount of technology that is required to succeed in today’s digital world. 

Using Risk Management Software to Mitigate a Broad Range of Vulnerabilities

The best risk management software systems are designed to handle more than just operational risk challenges. Ideally, you should select a platform that has the tools and capabilities required to manage other forms of risk, such as strategic risk and regulatory compliance risk. In fact, many risk management software platforms feature regulatory risk tools and even full-featured modules designed to help companies avoid non-compliance and its many negative consequences. 

Many banks can benefit from the development of a custom enterprise risk management platform. This allows you to include the exact features and functionalities you need to mitigate risks in specific areas, including operational risks in banks. But to generate a healthy ROI and to ensure success with operational risk mitigation efforts, you need a talented digital transformation development team; ideally, one that has experience developing enterprise software for banks and financial institutions. This experience can be very useful considering the unique challenges in this industry 

At iTech, our talented developers have been involved in innovative digital transformation projects for clients in the banking industry and the broader financial sector. Our goal is to identify the client’s challenges and objectives, architecting a feature set that can be used to address those issues. 

Our innovative developers also specialize in regulatory compliance software platforms. This broad range of expertise allows us to create enterprise software solutions that empower banks and others within the financial space to effectively manage and mitigate operational risks.

The iTech team will collaborate with the client, gaining an in-depth understanding of their business, its operations, and its challenges, goals, and priorities. Then, we’ll architect a digital transformation solution with the tools and features that the organization needs to succeed. We invite you to reach out to the iTech team today. Let’s begin a discussion about your bank’s operational risk management strategy and digital transformation needs.