Enterprise Risk Management in Banking

Posted on

Since the 2008 Financial Crisis, risk management has been an increasingly important subject in the banking world. Rightfully so, a variety of risk mitigation strategies and tactics have been employed over time to help protect and stabilize financial institutions.

The obvious “low hanging fruit” risk factors in the banking world include credit risk, interest rate risk, and liquidity risk. However, as a bank matures in its risk management competency, it begins to take a more holistic view of risk known as Enterprise Risk Management (ERM).

In a recent article on Banking.com titled ‘Using Enterprise Risk Management to Achieve Bank Stability,’ Matt Davis from Paragon Bank urges us to consider a broader list of ERM risk factors:

  • Operational Risk – Can the bank consistently and securely deliver services?
  • Compliance Risk – Does the bank conform to all applicable laws and regulations?
  • Strategic Risk – How effective is the bank’s strategy and can it be executed consistently?
  • Reputational Risk – Can the bank maintain its current reputation?
  • Financial Reporting Risk – How accurately does the bank report its financials?

We just had to look up Paragon’s scorecard on Stackfolio to see if their philosophy is paying off. Check out the “Risk Profile” section in the bottom center of the scorecard. In some ways, it does appear that their ERM program is paying off:

  • Net income is tracking upwards
  • Non-performing loans are WAY below their peer group
  • Net loss as a percentage of average loans and leases is very low

As with any bank, there are certainly opportunities to improve their risk profile:

  • Asset quality: Diversify into less risky asset types
  • Liquidity: Extremely low (i.e., high liquidity risk)

Clearly, managing risk at a bank is not an easy task. Our hope is that our free analytics solution helps provide better visibility and insights for you and your team.

How does your bank manage risk? We would love to hear from you in the comments below.