By Carl McCauley
Risk management reports are essential, yet they are often severely underutilized. Most banks use risk-related reports, including risk control self-assessments and key risk indicators, to understand the previous quarter and incidents that occurred in diagnostic exercises. While sometimes difficult to quantify how much value is being left on the table when it comes to analyzing risk management reports, providing a summary of past events isn’t enough for boards of directors to make informed decisions about future guidance.
Banks need to reorient their existing risk data strategies toward a more innovative goal: extracting business and market intelligence from risk reports.
Although risk reporting can offer more, manual processes and information silos limit the ability to extract greater value. Manually compiling reports is time-consuming and resource intensive. Because the process is so tedious, it’s also error-prone. And in a manually prepared report, the data is typically outdated by the time the report is completed—not to mention that there are limitations to the types of information that can be gleaned. While risk reports may show the results of past performance, they often don’t provide any actionable insights or recommend steps for the board to consider for improvements.
Understanding the past is important but extracting value from risk reports and applying the results is critical to the organization’s future. Risk reporting has far more to offer.
Historical view of bank data
Identifying emerging or unknown risks and the potential business impacts is one of the most difficult tasks that risk managers face. If their only sources of risk information are risk management reports, these managers must build bridges from recognizing problems that have already occurred to identifying emerging areas of concern or predict where risks might occur based on historical trends.
To provide a more complete picture to banks, risk insight must offer more than historical results. A holistic approach to mitigating existing and emerging risks must also bring in and analyze data from various sources that are often external to banks.
Improving risk reporting
Capturing not only internal data, but also external data, will help build a more comprehensive risk picture. Developing trends from reports will allow management to act well ahead of potential issues that could ultimately become major problems. A dashboard that contains KRIs will equip management with a more efficient view of all captured risks and trends. Finally, management will no longer be limited by the manual creation of insights that lead to expired data or lack of context.
For any dashboard to perform the above tasks, predictive analytics must be included. Predictive analytics use KRIs to identify when risks exceed their tolerances and trends to identify risks that are approaching their thresholds. Predicting emerging risks before they occur enables management to act before their risk appetite is exceeded. Those trends, especially data from external market indicators, can also be used to predict where risks in their business might occur even before internal data indicates a problem might exist.
The next generation of risk management software also provides capabilities to manage and track actions to help mitigate these risks. Predictive software solutions that use artificial intelligence can identify trends and provide suggestions on how to mitigate risk and areas of risk that business executives should investigate.
Now or never
For industry-leading risk teams, any delay in risk insights simply isn’t acceptable. The most accurate, up-to-the-minute view of risks requires real-time reporting. In addition to identifying trends, real-time risk reporting can crunch data from internal and external sources while providing immediate insights. This approach is the most effective and forward-looking method available for proactive risk management.
For example, KRIs that are captured by the business should be immediately available in risk reports; today, there are often delays in capturing KRIs (such as monthly updating of KRI metrics), tying updated KRIs to their associated risks and publishing in risk reports to senior executives and the board. Solving these delays provides immeasurable value to executives and can create competitive advantage by optimizing profitability, identifying new markets or accelerating new product innovation.
Smarter risk reports and predictive analytics
If a bank is using risk and control self-assessment, any data that is being tracked through spreadsheets, emails and other disparate sources can be moved into a RCSA management software application. This structured environment paves the way to begin providing necessary insights for extracting value from internal and external data in a much more automated and expedited way. With next generation software solutions focused on offering flexibility and configurability, the organization is often able to add value without having to change its risk program.
As the organization moves further along the risk maturity process, predictive analytics can be layered onto the RCSA. Risk insight reports and dashboards can be customized to display risks, KRIs, external data, and trends. They can also identify existing risks that may be starting to exceed the bank’s risk appetite and predict new and emerging risks that may impact the organization.
Moving from a manual method of risk reporting to one that is automated may seem like a large, disjointed effort. However, next generation risk management and insight solutions that enable a smooth, gradual migration process empower organizations to continuously evolve existing risk programs and frameworks while incrementally adding new business value.
Carl McCauley is CEO of 360factors, an ABA Endorsed Solutions provider.
