Risk Identification: What Have Banks Been Missing?

REPORT PREVIOUSLY PUBLISHED BY OLIVER WYMAN
September 17, 2015
Industry Trends
Global

Abstract

Risk identification is the process of taking stock of an organization’s risks and vulnerabilities and raising awareness of these risks in the organization. It is the starting point for understanding and managing risks — activities central to effective management of financial institutions. However, many legacy risk identification processes have not fully served institutions’ risk management needs, particularly those related to firm-specific stress testing and identification of the firm’s largest vulnerabilities. These processes were not sufficiently comprehensive and deep enough — failing to highlight key underlying drivers of risks. This, in turn, led to critical gaps in risk management. US regulators have taken note and have been pushing institutions to expand and enhance their risk identification processes, and clearly link risk identification to stress testing and broader risk management activities.

Traditional risk identification processes do not incorporate enough different perspectives on risks from across the organization; effectively distinguish the most significant risks from more minor risks; or sufficiently consider the underlying drivers of risks and how they could interact and amplify risks, or how minor risks might become severe in certain environments. As institutions adopt stress testing-based approaches to risk and capital management and spend more time on developing stress scenarios specific to their own vulnerabilities, risk identification approaches must enable institutions to better understand their vulnerabilities, and to mitigate or capitalize against them.

In Risk Identification: What Have Banks Been Missing? Oliver Wyman explains how improvements are required to banks’ risk identification processes in order to better inform scenario design, risk measurement and broader risk management needs, and to help financial institutions weather the next storm.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Introduction

3

Key Requirements of Risk Identification Today

5

Common Challenges and Pitfalls

8

Conclusion

10

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