Bridging the Gap: How Banks Can Innovate Risk Management by Learning from Non-Financial Corporates

As we navigate through an era characterized by an unprecedented amalgamation of technological advancements and global challenges, the finance sector, especially banks, is grappling with an evolving landscape of risks. Interestingly, while traditionally banks have been seen as the trailblazers in risk management, particularly in the financial risk domain, non-financial corporates seem to have adeptly embraced innovative strategies to navigate non-financial risks. So, can banks potentially harness insights from the strategies employed by non-financial companies to innovate their own risk management approaches?

Historically, banks have meticulously developed financial risk management strategies, crafting advanced systems and practices that stemmed and evolved from regulatory frameworks like Basel accords starting in 1988, followed by Basel II, III, and the anticipated Basel IV in 2023. But as we delve deeper into the digital era, it is imperative to explore and integrate strategies for managing non-financial risks, such as those emerging from digitization and cybersecurity.

A Tale of Two Sectors: Financial vs. Non-Financial Risk Management

In the financial realm, risk has always been considered quantifiable and manageable through established practices and regulatory frameworks. For example, banks navigate through various types of financial risks like credit, market, and liquidity risk, often using an equity-capital buffer to mitigate potential losses.

Conversely, non-financial companies have been navigating through operational risks arising from various processes and systems, which are not dissimilar to what banks encounter. The adeptness with which corporates have managed these risks, especially amidst fast-paced technological advancements, provides a fertile ground for banks to glean insights from.

Key Examples:

  • Digitization and Technological Risks: A foray into a digital business model opens up a Pandora’s box of cyberrisks, IT delivery risks, and business-continuity risks, among others. The tech corporate sector, thriving amidst digital risks, offers a reservoir of strategies that banks can adapt.
  • Critical Infrastructure Management: From telecommunications to energy sectors, each critical infrastructure industry adopts unique risk management strategies that banks could potentially adopt, especially in ensuring robustness and resilience of their operations.

Regulation and Centralization in Banking Risk Management

The heavy regulation in the banking sector, including obligations like the incorporation of a Chief Risk Officer (CRO) in its leadership, provides a structured but somewhat rigid framework for managing risks. On the other hand, non-financial corporates, whilst not bound by similar stringent regulations, have still managed to develop adaptive and often innovative risk management strategies, providing a contrasting model that banks might explore.

For example, McKinsey’s 2021 executive survey on corporate resilience uncovers various industry-specific strategies and perspectives on risk management and resilience, shedding light on how different sectors navigate through the myriad of non-financial risks they encounter.

Learning from Disparities and Commonalities

The diversity in approaches to non-financial risks, varying from one corporate sector to another, offers a platter of strategies that banks can analyze, learn from, and potentially integrate into their own frameworks. From understanding how the airline industry prioritizes and manages safety to comprehending how the software and automotive industries manage their product development and supply chains respectively, each provides unique insights and takeaways.

However, it’s imperative that banks also recognize and account for the disparities in risk appetites and business models between their operations and those of non-financial corporates. The applicability of certain strategies may thus need to be meticulously tailored to align with the specificities and regulatory obligations of the banking sector.

Moving Towards Resilience: The Ongoing Journey

Risks are not static and nor should risk management strategies be. Both banks and corporates must embrace an adaptive and forward-thinking approach, ensuring that risk management evolves in tandem with the morphing business and global landscape.

In the wake of recent global disruptions, notably the pandemic, corporates have been recalibrating their risk management mindsets, pivoting towards resilience and sustainability. As banks explore these strategies, ensuring that they are not only robust but also adaptive and future-proof will be crucial.

As the finance sector and banks traverse through an era ripe with both challenges and opportunities, integrating adaptive and innovative risk management strategies will be key. While the sector can glean valuable insights from the experiences of non-financial corporates, ensuring that these are molded and integrated in a manner that aligns with the unique operational and regulatory landscape of banking will be vital.

Through a confluence of learning, adapting, and innovating, banks can not only navigate through the present landscape of risks but also ensure sustained resilience in the face of future unknowns.

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