Integrated Risk Management 101: What and Why?

The size and complexity of the modern risk landscape make it difficult for financial institutions to account for every risk. When key stakeholders and decision-makers don’t have a clear line of sight into risk, it’s easy to fall short of strategic goals, milestones, and policy objectives. Integrated risk management offers institutions a solution to this problem.

Table of Contents

What is Integrated Risk Management?
The core components of an Integrated Risk Management framework
What is the difference between Integrated Risk Management and GRC?
How to implement an IRM strategy
The benefits of Integrated Risk Management
The challenges of IRM and why you need it

What is Integrated Risk Management?

Integrated risk management (IRM) encourages a more holistic and dynamic approach to risk management. With IRM, financial institutions recognize that individual risks are interconnected, can impact areas across the institution, and have coordinated systems and processes for comprehensive risk management.

Strategic and cross-disciplinary, IRM is about building a holistic risk ecosystem that improves institutional sightlines to enhance decision-making and respond effectively in both calm and turbulent market conditions.

The three pillars of IRM are:  

A risk-aware culture: Creating a risk-aware culture means that every employee – from management and the board of directors to your most recent entry-level hire – understands and participates in risk mitigation.

Devising an institution-wide risk management approach requires employees to understand how risk management applies to their daily work. Policies and procedures must be accessible. FIs must overcome communication barriers and departmental silos to make IRM work.

Related: What Are the Three Lines of Defense? 

An improved decision-making process: IRM gives banking leaders and stakeholders a more accurate and encompassing view of risk. Equipped with comprehensive insight into current and emerging risks, leaders make better decisions.

With the plans and resources to pivot when business or market conditions change, integrated risk management fortifies FIs against adverse events. For instance, FIs are more likely to have dynamic and responsive change management processes and business continuity plans under an IRM framework. When financial institutions deploy an IRM-based approach, they decrease the threat of monetary loss.

A performance-first approach to risk management: Integrated risk management is not a strategy for navigating your institution through threats. FIs that take a reactive stance to risk and compliance cannot seize opportunities.

IRM takes a proactive and performance-first approach to risk. When FIs experience issues, resource optimization becomes paramount. The IRM framework pays considerable attention to mitigating risk. But its primary purpose is to enable financial institutions to perform at a high level regardless of circumstances.

The core components of an Integrated Risk Management framework

The IRM framework relies on six core components. 

1. Strategy. Financial institutions should build a risk management framework that accounts for their size and unique market position. Strategic plans must consider available resources and set realistic expectations for incremental implementation. Pie-in-the-sky plans only frustrate employees and leadership.

2. Assessment. Banking leaders build an optimal control environment by identifying, evaluating, and prioritizing their most critical vulnerabilities. Compliance teams and internal audit and review functions are essential to risk assessments within the IRM framework. But integrated risk management delves deeper than the obvious, pinpointing risks traditional GRC frameworks consider out-of-scope.

3. Response. After identifying comprehensive risks, financial institutions develop action plans to address them. An FI’s strategy for managing risk should be tailored to its activities and risk appetite. As a first step, an institution with numerous third-party partnerships may plan for greater oversight of vendor relationships, while a bank with heavy geographic or industry concentration risk may look to diversify its portfolio.

4. Communication. Communicating risk management policies and procedures across your institution is critical to IRM. But it’s no easy feat. Departments sometimes resemble fiefdoms, with managers and constituents closely guarding their processes. The integrated risk management framework demands cross-departmental collaboration because every employee contributes to mitigation efforts.

5. Monitoring. The monitoring component of IRM builds on robust communication and reporting. FIs adopt measures that track accountability and ownership of risk to fulfill their strategic objectives.

6. Technology. Creating a risk and compliance culture is nearly impossible if FIs rely on manual tracking, reporting, and analysis. Automating workflows gives risk professionals the data they need at their fingertips. Wasting time with unruly spreadsheets and endless chains of emails restrains financial institutions from bringing their entire risk landscape into focus.

IRM connects disjointed risk management processes through communication, monitoring, and technology.

Explore Risk Performance Manager – Ncontracts’ IRM Solution

What is the difference between Integrated Risk Management and GRC?

Governance, risk, and compliance (GRC) has a narrower scope than IRM. Advocates of the GRC framework emphasize the interconnectedness of an institution’s governance, risk, and compliance functions, but they often remain disconnected. 

IRM takes a broader, more connected approach to risk, compliance, and governance. Integrated risk management solutions focus on leveraging risk to grow your FI. 

To understand the difference, let’s examine the following scenario for onboarding new vendors.

• Your financial institution has the strategic goal of outsourcing more banking functions to third-party vendors to decrease internal costs. 
• Under a GRC framework, you select a vendor and perform due diligence to ensure compliance with applicable laws and regulations, review financial statements and other essential documents, and establish that the vendor has adequate cybersecurity controls with a SOC-2 report. 
• Under an IRM framework, you expand risk assessments of potential third parties by aligning them with your strategic goals. For instance, do your third-party relationships accomplish your goal of decreasing internal costs? What are the upside opportunities of accepting greater residual risk to meet this objective? How do you weigh service-level performance expectations outlined in the contract against your goals?

Integrated risk management only works if financial institutions possess the technology tools for precise vendor risk ratings. Tracking and monitoring third-party risk is an agency requirement. But beyond mere compliance with regulations and laws, you can’t align vendor risk with strategic goals without a system for monitoring third parties throughout their lifecycle.

How to implement an IRM strategy

Following the six core components of IRM identified above, we offer a step-by-step guide to implementing this framework at your institution.

First, financial institutions must secure alignment between leadership and IT. Communication between leadership and cybersecurity professionals lays the foundation for adopting IRM-based technology. IT experts explain cyber risk to a non-technical audience, and leadership contextualizes this risk in its business strategy and technology plans.

Next, leadership and management gain buy-in from every stakeholder and employee. When management introduces risk-based business plans, it shares them with its teams. But how does leadership guarantee its policies, processes, and procedures are followed? We’ve seen plenty of employees failing to follow directives – even at larger banks that don’t struggle for resources.

Leadership and management must oversee findings and issues management and track mitigation efforts. Documenting policies and procedures only goes so far. Integrated risk management is unattainable without a platform that tracks findings against strategic goals.

While every institution desires better governance, GRC and IRM differ in their approach to accomplishing this goal. Under GRC, leadership relies on its risk and compliance functions to identify issues before proceeding – it is a reactive posture. With IRM, banking leaders achieve a comprehensive and nuanced understanding of risk, enabling them to identify issues proactively before they rise to a crisis level.     

Lastly, regular reporting is integral to IRM. Institutions must understand what strategies are or aren’t working. Technology-based integrated risk management solutions streamline the reporting process, compiling risk-centered data and analytics on one centralized platform.

The benefits of Integrated Risk Management

Significantly reduced compliance and remediation costs and increased profitability are the primary benefits of IRM. 

Integrated risk management gives financial institutions flexibility, allowing them to react quickly and adapt to changes in the market, regulatory landscape, and emerging risks. Change management is an evolving and dynamic process. At its core, IRM consistently delivers information that can be used to shape products and services to your consumers regardless of external circumstances. 

IRM builds on the banking industry’s strengths. While digital banking disruptors play fast and loose with regulations and protected consumer information, financial institutions can demonstrate their commitment to data security and integrity. Integrated risk management empowers FIs to guide the digital transformation on their terms, ensuring banking-as-a-service providers seeking to partner with them do not sacrifice sound risk management practices at the altar of innovation. 

Effectively managing risk nourishes consumer loyalty. Compliance missteps or failures can escalate quickly, leading consumers to take their money elsewhere (literally). Traditional GRC focuses on handling the interdependencies between risk and compliance. But in many cases, GRC is not prioritized because it exists independently from an FI’s business strategy. 

Sidelining risk and compliance management during strategic planning serves neither a financial institution nor its consumers. It’s a surefire way to undermine your growth efforts. IRM removes the barriers between successful risk management and profitable pursuits by streamlining these activities toward a single goal.

The challenges of IRM and why you need it

Financial institutions generally don’t like discussing risk management. Who can blame them? Nobody wants to talk about contingency plans for when something goes wrong. 

IRM changes the conversation. Instead of thinking about risk and compliance management as something you must do, think about it as something you want to do. Integrated risk management permits FIs to explore new business lines without looking over their shoulder at every turn. 

This doesn’t mean implementing IRM isn’t challenging. Moving from organizational silos to an institution-wide risk-aware culture requires an investment in employee training. Keeping track of an evolving regulatory landscape is complicated and time-consuming. Quantifying and prioritizing risks is hard – even for the most seasoned risk officers. Financial institutions with fewer assets have fewer resources.  

We understand the objections.  

But first, let us tell you about CBC Federal Credit Union from Ventura County, California.  

With only $500 million in assets, CBC had a vendor management system, a risk management solution, and a business continuity platform. The problem? CBC’s risk software suite was disconnected. 

As the former vice president of enterprise risk management explained: “We would try to figure out how to connect the dots of these systems. We would then make our own reports on Excel spreadsheets and Word templates.” 

Ncontracts’ IRM solution enabled the team at CBC to connect the dots. With our suite of products, data from one platform flowed seamlessly into another, giving the credit union a 360° view of its risk with a few keystrokes. 

CBC isn’t a $100 billion institution. But they recognize the wisdom of understanding risk holistically. Today, CBC has $800 million in assets under management. 

Our point? Integrated risk management doesn’t have to be a chore. Cost-effective ways of managing risk to jumpstart growth exist – and they're far easier to implement than you imagine.

Connect the Dots with Ncontracts