The Importance of Effective Risk Management: Lessons Learned From SVB and Signature Bank
The recent events within the financial markets with the 2nd and 3rd largest bank failures in US history have demonstrated the importance of strong, capable, and consistent Risk Management practices across the Financial Services sector at big banks as well as mid-size and emerging firms. While larger firms and big banks have invested in building Risk Management capabilities including Risk Analytics and Risk Intelligence mid-size, regional, and emerging firms may not have the capacity to compete for the right resources to build Risk Management as a strategic partner for the firm's Executive Team and Board of Directors.
Effective Risk Management requires firms to integrate Risk into all decisions a firm makes. In order to do so firm's need to build strong insight into their own strategy, financials, and operations as well as their external risk factors impacting the firm's ability to achieve their strategic goals. This requires a strong Risk culture and the ability to sense, identify, monitor, and assess risks against a stated risk appetite across the full spectrum of Risk areas. Key Risk areas to consider based on recent events:
1. Financial and Credit Risk Management and Intelligence
Risk modeling development and stress testing to evaluate asset values, credit- and interest-rate risk
Development and application of risk models to build forward looking risk intelligence
Stress testing of the models to account for macro-economic factors
2. Strategic Risk Management and Intelligence
Growth strategy, both organic (customer and product growth) and inorganic (M&A) needs to be evaluated against both short- and long-term risk appetite and include stress testing for macro-economic factors
Due-Diligence and market analysis for growth options including long term growth and profitability potential
Concentration Risk of a firm's customer base - geographic footprint, industries, markets, and products
3. Counterparty Risk Management and Intelligence
This Risk area is increasing in importance given the complexity of the financial industry as well as any firm's operating echo-system it operates in. Key counterparty risks to consider for risk monitoring, assessment, as well as modeling for forward looking intelligence are:
Third-Parties / vendors from onboarding through ongoing monitoring of the vendor's ability to operate within a firm's risk appetite
Fourth-Parties (your vendor's vendor) is an emerging risk topic you need to consider when analyzing your Risk profile to build a complete risk intelligence view
Financial counterparties providing financing and financial transaction management for non-bank participants in the financial industry
Concentration risk across all counter-parties - geographic footprint, industries, markets, and products
4. Regulatory Compliance Risk and Intelligence
A likely outcome of the government action to back all deposits at SVB and Signature Bank will be increased regulations across the financial industry combined with increased regulatory oversight and enforcement. Firms should be proactive in monitoring the regulatory landscape as well as predict regulatory changes and their effect on their firm's Risk appetite and tolerance.
5. Moral Hazard of Government Action
The backing of all deposits creates a Moral Hazard for banks. Firms who do not build the appropriate Risk Management and Intelligence capabilities will rely on future government actions when risks materialize. To avoid this moral hazard firms should invest in and build a strong Risk culture and a capable Risk Management Center of Excellence to help guide the journey.
Clarendon Partners is here to support you on this journey with knowledgeable experts in Risk Management from your interim CRO to Risk Management Professionals. Contact us today at digital@clarendonptrs.com to discuss your organization’s needs.
