The theme of the column revolves around Risk and Governance.
The Global Financial Crisis followed the episodes of severe repercussions for financial and economic fragility. From the Global Financial Crisis perspective, the crisis highlighted the absence of an enterprise-wide risk decision-making process.
Resilience likely to be countered by major key challenges in Governance like:
- The inherent uncertainty in any modeling approach for the overall framework ;
- Weaknesses in the Bank’s Risk Management Procedures, Systems, or Internal Controls ;
- Enterprise Risk Management Decision Making Process ;
What is Risk Governance?
Risk Governance is defined as an integrated framework laid out to provide guidance for comprehensive assessment and management of risks. The success of an effective Risk Governance Framework lies in if the firm is able to achieve its defined objectives within the chosen risk appetite framework. The approach must be holistic in this regard, inclusive more of risk appetite and the tolerance level, and the viability of the mission statement.
Risk Governance is most essential for the modern backbone i.e. Banking
The Banking Business has become far more complicated with the advancement of technologies and new digital payment gateways. Risk, too, has increased in proportion in this context and to this complexity. Banks perform a critical function of risk transformation, which results in Banks’ warehousing of risks.
Given their unique business model and the role played in the financial system, sound internal governance for Banks is essential, requiring to focus more on assessing, managing, and mitigating risk.
Risk Models : Traditional and Modern
The Risk Management Systems must consider the limitations and viability of the traditional risk models, such as Value at Risk (VaR). Effective Risk management tools like Stress Testing and Scenario Analysis need to be established and to be integrated across all the standardized business lines, types of risk, and asset classes.
Undoubtedly, the unexpected COVID-19 has impacted almost everything and raised concerns about Resilience, Revenue Growth, and Risks.
There is a need for a plan for evaluating Operational Resilience that can help firms identify critical economic factors and continue to grow in a post-pandemic world. To some extent, we can expect Post-Pandemic, for markets to return to an acceptable risk level.
Additionally to catch up Operational Resilience, the feasible approach that could work:
- Focus on Business Continuity Plans
- Reaching untapped potential opportunities
- Rethink Challenges
- Resetting Revenue Outlook and Risk Governance
- Restructuring Plans
- Redrafting the post-COVID-19 Strategy
The building of a robust Risk Framework, strong controls, and optimizing Risk Management tools is inherently important along with various prudential measures like dynamic provisioning basis the projections that go a long way in strengthening and smoothening the resilience against the cyclical shocks.
As we could see, the country’s sectors are overcoming the pandemic phase full of challenges and crisis, which can be witnessed as a big hurdle to the future growth story.
Generally, the significant impact on one segment is bound to have a ripple effect on the entire system.
Considering the whole readiness for addressing further volatility of this nature, one-time restructuring across sectors and viability is needed to be established reviewing the inherent risk profile ofcourse and thereby Risk Governance .
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Very well written, Deepika