BANKS IN THE VUCA WORLD
Effective Risk Management Raises Banks’ Value by up to 24%
Recent negative reports from the financial industry make it clear that banks and financial institutions urgently need strategy-oriented risk management.
In a volatile environment, risk management is not merely a regulatory and compliance element, but it also becomes a decisive active design element in ensuring profitability and sustainable growth.
According to the new analysis “Navigating risk” by Roland Berger Strategy Consultants, banks that implement an improved risk management strategy see their market value go up by as much as 24 per cent.
“At many banks, there is a direct relationship between the quality – i.e. the effectiveness – of risk management, and the sustainability of profit development,” says Dr. Marc D. Grüter, Partner in Roland Berger’s global Financial Services Competence Center and Head of the Global Finance and Risk Practice.
Successfully navigating risk requires integrating risk management into the overall strategy. A crucial aspect here is concentrating on high-risk areas, which calls for an understanding of complexity drivers and key interdependencies. “The latter is particularly difficult, since the banking environment is becoming noticeably more turbulent and challenging in a VUCA world (volatile, uncertain, complex, ambiguous),” explains Dr. Grüter.
Risk management playing a larger role
The uncertainties of a globalized market include regulatory changes and decreasing margins, which increase the pressure to develop innovative products and services. New products and new businesses are therefore exposed to additional risk. At the same time, a new risk culture has emerged in the wake of the financial crisis. “These new realities in the financial markets mean that risk management is taking on ever-greater importance at banks,” says Sven Bischof, Senior Consultant in the global Financial Services Competence Center.
Higher liquidity risks
The collapse of large insurance companies and the short-term liquidity crises at major banks have shown that a high credit rating no longer means what it used to. That’s why liquidity issues are moving into the focus of risk management. The “element of uncertainty” of liquidity has three main components:
1) Cash flow risks that emerge when actual cash flows deviate from expected cash flows
2) Funding risks when external funding is limited in volume or only accessible at a high cost
3) The risk of market illiquidity occurs when assets (i.e. government bonds) can only be liquidated at rock-bottom prices
Bank management must analyze liquidity reserves to create a risk buffer for these potential liquidity risks. Similarly, banks must have enough capital reserves to prevent solvency risk.
Integrate risk management into the overall strategy
Banks can respond to the increasing importance of risk management by centralizing the risk functions (e.g. operational risk management). Top-down targets for designing risk management make it easier to bundle the risk-relevant information and improve cost efficiency.
It’s evident that successfully integrating risk management into the overall strategy leads to more intelligent and more sustainable decisions. But this alone is not enough. The challenge lies primarily in keeping risk awareness and risk culture within a bank or financial firm at a high-alert level.
By Atique Naqvi | Dubai, UAE | Uploaded on the blog recently**
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| Risk management should be part of overall strategy of a bank. |
In a volatile environment, risk management is not merely a regulatory and compliance element, but it also becomes a decisive active design element in ensuring profitability and sustainable growth.
According to the new analysis “Navigating risk” by Roland Berger Strategy Consultants, banks that implement an improved risk management strategy see their market value go up by as much as 24 per cent.
“At many banks, there is a direct relationship between the quality – i.e. the effectiveness – of risk management, and the sustainability of profit development,” says Dr. Marc D. Grüter, Partner in Roland Berger’s global Financial Services Competence Center and Head of the Global Finance and Risk Practice.
Successfully navigating risk requires integrating risk management into the overall strategy. A crucial aspect here is concentrating on high-risk areas, which calls for an understanding of complexity drivers and key interdependencies. “The latter is particularly difficult, since the banking environment is becoming noticeably more turbulent and challenging in a VUCA world (volatile, uncertain, complex, ambiguous),” explains Dr. Grüter.
Risk management playing a larger role
The uncertainties of a globalized market include regulatory changes and decreasing margins, which increase the pressure to develop innovative products and services. New products and new businesses are therefore exposed to additional risk. At the same time, a new risk culture has emerged in the wake of the financial crisis. “These new realities in the financial markets mean that risk management is taking on ever-greater importance at banks,” says Sven Bischof, Senior Consultant in the global Financial Services Competence Center.
Higher liquidity risks
The collapse of large insurance companies and the short-term liquidity crises at major banks have shown that a high credit rating no longer means what it used to. That’s why liquidity issues are moving into the focus of risk management. The “element of uncertainty” of liquidity has three main components:
1) Cash flow risks that emerge when actual cash flows deviate from expected cash flows
2) Funding risks when external funding is limited in volume or only accessible at a high cost
3) The risk of market illiquidity occurs when assets (i.e. government bonds) can only be liquidated at rock-bottom prices
Bank management must analyze liquidity reserves to create a risk buffer for these potential liquidity risks. Similarly, banks must have enough capital reserves to prevent solvency risk.
Integrate risk management into the overall strategy
Banks can respond to the increasing importance of risk management by centralizing the risk functions (e.g. operational risk management). Top-down targets for designing risk management make it easier to bundle the risk-relevant information and improve cost efficiency.
It’s evident that successfully integrating risk management into the overall strategy leads to more intelligent and more sustainable decisions. But this alone is not enough. The challenge lies primarily in keeping risk awareness and risk culture within a bank or financial firm at a high-alert level.
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