Within the world of banking and finance, risk management stands as a cornerstone for stability. However, despite its importance, banks worldwide continue to face significant losses and even collapse due to a fundamental error in their risk management approach. This error lies in the misallocation of focus—too much attention is given to root causes rather than the risks.
The repercussions of this misalignment extend far beyond individual bank failures; they permeate the global financial landscape, resulting in substantial financial losses and systemic instability. Addressing this issue demands a paradigm shift: from cause management to true risk management.
A compelling real-world example sheds light on the transformative power of prioritising risk over cause. For instance, in the case of Lehman Brothers, prior to its collapse in 2008, the focus was predominantly on addressing immediate issues and symptoms rather than delving deep into the underlying risks within its mortgage-backed securities. This failure to adequately assess and mitigate risks ultimately led to one of the most significant financial crises in history, with far-reaching consequences felt across the globe.
It is a widespread pattern observed in numerous bank failures: a failure to prioritise risk management over reactive cause management. As lamented by industry experts, the prevailing trend sees banks unwittingly transitioning into cause managers rather than true risk managers— and that comes with consequences.
An example that we talk about in our recent webinar, Risk Management: Why Are Banks Failing? is of a global bank, which since 2021 has been implementing a seemingly simple yet remarkably effective change in its risk management strategy. This proactive approach, the steps of which we work through during the session, allowed this bank to promptly investigate and rectify underlying problems, preventing potentially catastrophic consequences. The outcome? Over $2.5 billion in savings - a testament to the tangible benefits of risk-centric management.
Financial regulators are increasingly emphasising individual accountability in the banking sector, shifting the focus from solely holding institutions accountable to also targeting the actions of key executives and employees. This approach aims to enhance personal responsibility and deter misconduct by ensuring that individuals face consequences for their decisions and behaviours. A notable example is the Financial Conduct Authority (FCA) in the UK, which introduced the Senior Managers and Certification Regime (SM&CR). This framework (which is now being replicated around the world) mandates that senior managers must be formally approved by the FCA and assigns specific responsibilities to named individuals, holding them directly accountable for their areas of oversight. By implementing such regulatory frameworks and personal liability measures, regulators seek to promote ethical practices, improve compliance, and restore public trust in the financial system. This trend underscores the importance of personal integrity and diligence in maintaining the stability and integrity of financial institutions.
To mitigate the risk of banking collapses and operational losses, a decisive return to risk-focused strategies is imperative. By refocusing efforts on identifying, assessing, and mitigating risks inherent in their operations, banks can become more resilient.
Watch our webinar, Risk Management: Why Are Banks Failing? to find out more about how you can employ this strategy for your financial institution.
To learn more, register for our free Short Course: Making Risk-Based Decisions Safely to discover the three key actions you can take to ensure that you can confidently make tough decisions while remaining compliant with your roles and responsibilities.