What is the Risk Management Process?

Organizations need a risk management process to identify, measure, and control risks that jeopardize business operations and negatively impact their bottom line. For financial institutions, having a method for managing risk is especially important, given how dramatically risk affects them from an operational and regulatory standpoint, including the potential for consumer harm. 

Successful risk management strategies and processes empower financial institutions and other organizations to comply with regulations and laws, protect themselves from unexpected events, and meet business goals. 

Many institutions benefit from enterprise risk management (ERM), leveraging technology to understand risk holistically and devise plans to mitigate its harm. 

With ERM, organizations prioritize the interconnectedness of different risks on an institutional level rather than assessing each individually. When organizations depend on manual and siloed processes for risk management, they lack the flexibility to make changes on the fly, anticipate the impact of new regulations, adjust their business models to meet different market conditions, and regularly assess processes and systems for weaknesses. 

Table of Contents:

• Types of Financial Institution Risk 
• The 5-Step Risk Management Process 
• Transforming Your Institution's Risk Management Processes

Related: GRC vs. ERM vs. IRM: Understanding Risk Management Frameworks 

Types of Financial Institution Risk 

It’s essential to address the many types of risk your organization faces. For financial institutions, these include (but aren’t limited to): 

• Operational risk: The failure of people, processes, and systems 
• Transaction risk: The inability to deliver products and services to consumers as expected 
• Compliance risk: Failing to adhere to laws and regulations 
• Third-Party risk: Vendors misconduct or failure to meet their contractual obligations or fulfill regulatory obligations 
• Strategic risk: The failure to meet business goals or complete projects 
• Reputation risk: The loss of consumer trust and public confidence in your institution 
• Cyber risk: The risk of failing to mitigate cyber threats and vulnerabilities 

Enterprise risk management allows institutions to streamline the above risks with a single solution, expediting and enhancing risk management. 

The 5-Step Risk Management Process  

What is the 5-step risk management process? Let’s find out. 

Risk Identification

The first step in risk management is identification. Some of the actions organizations might take to identify risks include: 

• Observing industry trends and news stories 
• Regulatory change and updates 
• Roundtable discussions with departments and key stakeholders 
• Examining past risk reports and findings 
• Enlisting the help of senior management and the board 
• Alerts 
• Peer discussions 

You must invest time and go beyond the obvious risks. When identifying risks, think creatively and ask questions. When was your last compliance review? Have there been any changes in the regulatory landscape? 

It’s essential to identify as many risks as possible. One problem with going about risk management manually is the struggle to track documentation and manage complex spreadsheets. Files become unwieldy and unmanageable and you may lose critical documents. 

Unifying your risk data on a single platform or system helps you keep track of it. The benefit of the ERM approach is that it makes risks visible to all your stakeholders. This openness allows immediate access to risk reports, ending the endless loop of emails and confirmation whenever someone in your organization needs a document. 

Risk Analysis and Evaluation

Once you identify a risk, you need to conduct a risk assessment by quantifying two types of risk: inherent risk and residual risk. 

Your inherent risk score measures the amount of risk exposure if your organization had no defenses to mitigate the risk. For example, what is the risk of a data security breach if your institution uses the cloud to store sensitive data?  

Inherent risk can be expressed with the following formula: Inherent Risk = Impact of the Event * Probability 

Evaluating risk should not be subjective. Risk assessments should be based on data, including vendor due diligence, audit, exam and compliance review findings, and other information. Risk assessors need guidelines to label risks based on their impact and probability of occurrence. For example, you might label risks “high,” “moderate,” or “low.”  

In the example above, a data breach is highly likely if there are no controls to mitigate the risk and the impact of the event could be catastrophic since laws like Gramm-Leach-Bliley (GLBA) demand that consumer data is protected. That means the inherent risk is high. 

Inherent risk doesn’t tell the whole story. Risk management controls are the measures and processes organizations implement to mitigate risk. They are there to reduce the probability and impact of an event. Risk controls can be preventive (they prevent risk), detective (they detect risk), and corrective (they correct a problem). 

Controls for mitigating risk include (but aren’t limited to): 

• Policies and procedures
• Employee training programs 
• Audits and findings management 
• Quality control measures 
• Technological capabilities 

The risk that remains after accounting for controls is residual risk.  It’s calculated with the formula: Residual Risk = Inherent Risk * Control Effectiveness. 

Let’s return to the earlier example: your institution is storing sensitive consumer data on the cloud. Vendor due diligence reveals the cloud vendor is up to date on industry best practices for data security. You have a process for regularly monitoring the vendor to ensure its data security practices remain strong. 

In this case, the inherent risk is high, but there are strong controls to prevent a breach. However, you also know that cyber criminals are continually evolving, and even good data security systems can be breached. Even with controls, the residual risk is high.  

Treat the Risk

Once you’ve quantified residual risk, you need to decide what you want to do about it. There are four main approaches. 

1. Avoid. Decide the activity isn’t worth the risk and abandon it. 
2. Mitigate. Add or strengthen controls to reduce the likelihood or impact of the risk. 
3. Transfer/Share. Shift risk to another party, for example with cyber liability insurance. 
4. Accept. Acknowledge the risk and accept its consequences. 

The decision an institution makes will be guided by its risk appetite, or how much risk it is comfortable taking on. This varies from institution to institution. In the case of using the cloud, a financial institution will face data security risks whether its servers host sensitive data or someone else does. As long the institution believes that the cloud provider has strong security, it might make sense to accept the risk since it offers other efficiencies. 

Monitoring and Review

Risk is dynamic. Financial institutions need to monitor risk and review controls to ensure they remain comfortable with the amount of risk exposure.  

One way to do this is with key risk indicators (KRIs) that serve as an early warning system when the risk environment changes. KRIs help organizations know what to look for as their risk environment changes. For example, if the number of attempted cyberattacks is increasing or the cloud vendor’s system is often down for maintenance, it might be a sign that more risk controls or needed – or that the relationship isn’t working.  

Monitoring key risk indicators helps organizations proactively reassess and manage risks, taking corrective actions early before issues escalate into significant problems. 

Risk management requires a continuous investment in monitoring. Organizations that manage risk manually must regularly input the status of each risk onto a document or spreadsheet, a time-consuming process typically involving continuous permissions requests. Risk management becomes much less burdensome with a software solution that comprehensively organizes risk data in a single centralized location. 

Communicate 

Even with meticulous risk assessments and a carefully calibrated risk appetite, a financial organization's risk management efforts won’t amount to anything if the results aren’t communicated and acted on.  

The "communicate" part of the risk management process steps involves sharing information about risks and risk management activities with relevant stakeholders. Effective communication ensures that everyone involved is aware of the risks, the measures being taken to manage them, and their roles in the risk management process. 

First, it is essential to identify who needs to be informed about the risks. Stakeholders can include employees, management, board members, regulators, customers, and third-party service providers. For a financial firm, stakeholders might include compliance officers, IT staff, senior management, and external partners like auditors or regulators. 

Developing a communication plan is the next step. This plan outlines what information needs to be communicated, to whom, how often, and through what channels. Examples include regular risk reports to the board, quarterly updates to employees, incident response procedures shared with all staff, compliance updates sent to regulators, and training to make sure everyone understands what it expected. 

Using clear and concise language is crucial to ensure that risk information is easily understandable by all stakeholders, avoiding technical jargon when possible. For instance, when explaining cybersecurity risks to non-technical stakeholders, it helps to use analogies and simple terms to describe the potential threats and mitigation strategies. 

Establishing feedback mechanisms allows stakeholders to provide input on the communicated information, ensuring that communication is two-way. Methods can include surveys, feedback forms, and regular meetings where stakeholders can ask questions and express concerns about risk management practices. 

Regular updates are necessary to keep stakeholders informed about changes in the risk landscape, including new risks, and the status of risk management efforts. This can be achieved through monthly risk management meetings, weekly status emails, and updates to risk management dashboards accessible to key stakeholders. 

Documentation and reporting are vital components of risk communication. Keeping detailed records of all risk communication activities, including what was communicated, to whom, and when, helps maintain transparency and accountability. Examples include logs of risk reports sent to management, meeting minutes from risk committee meetings, and records of training sessions on risk management. 

Finally, having a crisis communication plan is essential for communicating during a crisis or when a significant risk event occurs. This ensures that timely and accurate information is shared with all affected parties. For instance, a predefined communication strategy for data breaches might include immediate notifications to affected customers, internal teams, and regulatory bodies. 

By effectively communicating risks, organizations can ensure that all stakeholders are informed, engaged, and prepared to contribute to the risk management process, ultimately enhancing the organization's ability to manage and mitigate risks. 

Related: Training Enterprise Risk Management Heroes – Maximizing the Board and C-Suite 

Transforming Your Institution's Risk Management Processes

Financial institutions that want to streamline their risk management processes should take a closer look at Nrisk, Ncontracts’ comprehensive solution for integrated risk management.  

Nrisk provides a centralized platform that allows institutions to systematically identify and assess risks across all departments and functions. This holistic view ensures that all potential risks are captured and evaluated consistently, leading to more accurate risk assessments and a smoother risk management process. 

Real-Time Monitoring and Reporting. With Nrisk, institutions can monitor risks in real-time, identifying emerging risks that require action. The platform also offers customizable reporting tools that generate detailed, up-to-date risk reports that improve decision-making and risk management. 

Enhanced Collaboration and Accountability. Nrisk fosters collaboration among stakeholders with a unified platform for risk-related activities and communication. This transparency ensures that everyone is on the same page while promoting accountability with task assignment and tracking. 

Advanced Analytics and Insights. Nrisk leverages advanced analytics to provide deeper insights into risk trends and patterns. These insights help institutions anticipate potential issues and develop more effective risk mitigation strategies before they escalate.  

Integration with Other Ncontracts Solutions. Nrisk integrates seamlessly with Ncontracts’ other solutions, reducing data silos and ensuring that risk information is comprehensive and up-to-date. 

Risk Culture Development. Nrisk helps institutions foster a proactive risk culture by embedding risk management into daily operations. Employees at all levels become more aware of risks and more engaged in the risk management process, leading to a more resilient organization. 

Continuous Improvement. Nrisk supports a continuous improvement approach to risk management by providing tools for regular risk assessments. This ensures that the institution's risk management practices remain relevant and effective in a changing risk landscape. 

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