Finserv Glossary

Risk Management

What is Risk Management?

There are multiple issues and considerations that comprise the entirety of risk management in the financial services industry. Managing risk for banks, wealth management firms and insurance companies often encompasses the need to comply with relevant local, state and federal regulations, providing for disclosures and auditability to ensure consumer protections. To this end, technology companies regularly collaborate with financial service and insurance companies to support their risk management efforts,  by providing technology that allows for automated compliance, reviews of regulated content, and disclosure management. 

According to the Consumer Finance Institute (CFI), a recognized finance training, certification, and skill development platform: Risk management encompasses the identification, analysis, and response to risk factors that form part of the life of a business. Effective risk management means attempting to control, as much as possible, future outcomes by acting proactively rather than reactively. Therefore, effective risk management offers the potential to reduce both the possibility of a risk occurring and its potential impact. 

CFI also identifies the following forms in which response to risks usually take on:

  • Avoidance: A business strives to eliminate a particular risk by getting rid of its cause.
  • Mitigation: Decreasing the projected financial value associated with a risk by lowering the possibility of the occurrence of the risk.
  • Acceptance: In some cases, a business may be forced to accept a risk. This option is possible if a business entity develops contingencies to mitigate the impact of the risk, should it occur.

When creating contingencies, a business needs to engage in a problem-solving approach. The result is a well-detailed plan that can be executed as soon as the need arises. Such a plan will enable a business organization to handle barriers or blockage to its success because it can deal with risks as soon as they arise. As noted by CFI, risk management is an important process because it empowers a business with the necessary tools so that it can adequately identify and deal with potential risks. Once a risk has been identified, it is then easy to mitigate it. In addition, risk management provides a business with a basis upon which it can undertake sound decision-making. Risk analysis is a qualitative problem-solving approach that uses various tools of assessment to work out and rank risks for the purpose of assessing and resolving them.

Separately, The Federal Reserve addresses risk management and corporate compliance in the following statement: “Organizations supervised by the Federal Reserve, regardless of size and complexity, should have effective compliance risk management programs that are appropriately tailored to the organizations’ risk profiles. The implementation and oversight of compliance risk management programs can vary considerably depending upon the scope and complexity of the organization’s activities, the geographic reach of the organization, and other inherent risk factors. Larger, more complex banking organizations tend to conduct a wide range of business activities that are subject to rigorous compliance requirements that frequently transcend business lines and legal entities and, accordingly, present risk management and corporate governance challenges.”