Streamlining Banking Risk Management: The Benefits of Implementing a Risk Management Software

Of all business sectors and industries, business leaders in the financial sector and banking space are confronted with some of the most complex risk management considerations. Banks, credit unions, lenders, and other financial service providers are frequently targeted by criminals — especially cybercriminals — due to the many areas of vulnerability that exist within banks and other companies within the financial services space. 

A high degree of risk is inherent to the business model that banks tend to utilize. For example, a bank that is involved in lending money takes on an element of risk with each loan that is disbursed. There’s a chance that the borrower will default on the loan, resulting in financial losses for the banking institution. These risks can be minimized or offset somewhat by implementing stricter criteria for borrower loan approval and charging higher interest rates and fees to borrowers who are deemed to represent a higher level of risk. But at the end of the day, there is still an element of vulnerability and some degree of unavoidable risk still remains. 

The complex and multifaceted nature of banking risk management leaves many business leaders wondering how risk management software can streamline their efforts to minimize risks, reduce vulnerability and neutralize threats. This begs the question: what are the benefits of implementing a risk management software platform for a bank or other financial services company? 

Benefits of Risk Management Software: Avoiding Non-Compliance With a Formulaic Approach to Risk Mitigation

The complexities of banking risk management make it challenging to develop an effective risk mitigation strategy. Actually deploying risk mitigation solutions is made even more difficult thanks to the many rules, laws, and regulations that exist, from cybersecurity and financial data management rules to record-keeping laws and regulatory compliance burdens. These regulations and laws must be carefully considered to avoid non-compliance, fines, and other negative consequences. A well-architected banking risk management software platform will offer useful guidance that helps you avoid this sort of challenge. 

These software platforms also help banks avoid non-compliance by providing a comprehensive framework that guides a bank’s efforts. This formulaic approach to risk management was originally developed by the National Institute of Standards and Technology (NIST) in an effort to protect the U.S. government’s technology and IT systems. The framework has since been adapted for use in other industries, like the financial industry and banking sectors. 

Banking Risk Management Software to Minimize the Different Types of Financial Risk

Banks must confront several unique types of financial risk — forms of risk that are unique to this industry. A well-architected banking risk management software system will provide support for these different risk factors and the mitigation measures that are required to effectively address each one. Here is a look at the different types of financial risk. 

Systematic Risk

Systematic risk refers to inherent, in-built threats, vulnerabilities, and risk factors that cannot be avoided or fully eliminated within the banking industry. All banks and financial institutions share a similar systematic risk profile.  

Unsystematic Risk

Unsystematic risk — also called non-systematic risk — involves risk factors and vulnerabilities that are unique to a very specific business; even a single company. These threats can include a bank’s leadership, its location, or its financial obligations. These risks can be rather difficult to mitigate due to their unique nature and narrow field of impact. 

Income Risk

Income risk refers to the threat that an income stream will decrease as a result of interest rate modifications. Income risk is most commonly associated with money market accounts, where you have an adjustable interest rate that could potentially change in an unfavorable manner. Longer-term income funds represent a lower risk level since these accounts tend to lock in a more stable interest rate. 

Credit Risk

Credit risk affects any bank or credit union business that deals in loans and lines of credit. There is always a risk that the borrower could default on the loan or fall behind on credit card payments, resulting in a financial loss for the bank or lender. This type of risk is unavoidable because it’s built into the lending business model, although some of the risks can be offset by charging higher interest rates, borrowing fees, and being more selective when approving borrowers. 

Liquidity Risk

Liquidity risk refers to the risk factors that are associated with the losses that may impact a bank if it is unable to pay its debts and meet other financial obligations in a timely manner. For example, funds may be locked up in a long-term investment that would carry a significant early withdrawal fee if the funds were pulled out now. This lack of liquidity may make it impossible for the financial institution to meet its payment obligations. 

Asset / Investment Risk

Asset risk — which is sometimes called investment risk — refers to threats and vulnerabilities that are associated with investment performance and stock market changes. These fluctuations can affect the value of stock shares, futures, currencies, and options. 

Currency Risk

Currency risk — also known as exchange rate risk — refers to the potential for losses arising from changes in currency values This form of risk is the greatest concern for companies that deal in multiple currencies. An unfavorable change in currency value and exchange rate can lead to financial losses. 

In addition to these financial risks, your risk management software will deliver benefits as it relates to your efforts to mitigate more general risk factors, including operational risk, strategic risk, systems risk, and external events risk. 

The best banking risk management software will include mechanisms for managing short-term and long-term financial risks. Data collection, monitoring, and reporting are all important parts of an effective long-term risk mitigation strategy. Your chosen risk mitigation software system should include tools that allow you to keep track of your risk management situation, with data that allows you to make informed decisions on how to proceed with your mitigation efforts. 

More Effective Regulatory Compliance as a Benefit from Banking Risk Management Software Platforms

Regulatory non-compliance represents a tremendous risk to banks and other financial institutions. As one of the most heavily regulated industries, the banking sector exists within a complex risk management landscape. There is a significant potential for fines, penalties, and other adverse consequences if a bank fails to remain compliant. In fact, nearly a dozen banks were recently issued fines totaling nearly $2 billion dollars. 

Banking risk management software systems offer tools for achieving and maintaining regulatory compliance. This includes monitoring for regulatory changes and new regulatory burdens, along with tools for deploying new measures that are necessary for maintaining compliance.  

The dynamic, ever-evolving nature of risk management brings many challenges, especially in an industry where a high degree of risk is considered par for the course. At iTech, risk management solutions are our specialty and we use cutting-edge technology to give our clients a competitive advantage with an exceptional ROI. Our team works with the client to gain an in-depth understanding of their unique vulnerabilities, goals, and risk mitigation needs. Then, our innovative development team will get to work creating a Digital Transformation solution that will bring about the maximum benefit. Contact the iTech team today and let’s begin a discussion about your bank’s risk management challenges and your strategies for mitigation.