New Banking Risk Types?
I can still remember, back in my early days as a banking supervisor at the Bank of England, when supervisors focused on only three types of risk – credit risk (including country risk), market risk, and liquidity risk. Then, during my time at the HKMA, the spectrum was widened to include operational risk, interest rate risk, reputation(al) risk, and strategic risk.
In recent years we have added technology risk, regulatory risk, and conduct risk (all, one could argue, aspects of existing risk types, - i.e. operational or reputation(al) risks – but now sufficiently important in their own right to be stripped out and treated separately).
So, what next? Looking forward, are there other risk types we should be considering as separate risks? As a bit of fun, I recently challenged my team to come up with some catchy “new†risk types, and they came up with the following two:
- “Xenophobia riskâ€. Xenophobia is the fear of what’s foreign or strange or not understood. In relation to banking this could result in institutions “sticking to what they know best†and failing to keep up with the latest trends in terms of technology and the public’s expectations, and ultimately becoming less relevant or even, dare I say it, obsolete. Applied to banking supervisors, it could mean restricting institutions to traditional activities and ways of working, thereby not providing an environment that promotes innovation and market development, such that the financial system and financial markets fall behind leading jurisdictions and stagnate.
- “Unfashionability riskâ€. This would be the risk that the public’s desire for “something new†in terms of brands – internet/social media brands, consumer brands – rather than what they regard as “staid, old fashioned, past their sell-by date†banking brands, drives business away from traditional providers towards disruptors. The challenge for traditional providers is two-fold: first to keep up with challengers in terms of products, services and technology, but also to keep their brand (again, dare I say it?) “sexy†(i.e. attractive/desirable).
Of course, one could easily argue that both of these risks are not new (they’re both types of strategic risk, maybe), but it’s always useful to look at old issues in a new light, and these two do indeed appear to be becoming very topical in today’s fast-changing environment…
Chartered Accountant | Enterprise Risk Consultant | Risk Committee Member
5 å¹´I get saddened when I see these views. There is only one risk, and that is the amount of risk/volatility you are prepared to accept in order to achieve your goal or purpose within a defined time frame. If you have no goal or no time frame to achieve that goal, you have no risk. If you do, you achieve it by managing the drivers of the volatility in fulfilling the purpose or reaching the goal. First. Strategic risk drivers, or SWOT in capability, which cannot be addressed or dealt with in the short term. Second, Business risk drivers, or SWOT in capacity, which require compromises in either timeframe, resources, or outcomes. Then there are the three Risk drivers of operational activities. Those risks that you manage to get access to resources to achieve your purpose, those that you manage to preserve and best utilise the resources you control in order to achieve your purpose, and those you manage to remain relevant, and preserve the support of your stakeholders in order to achieve your purpose. One risk: one driver regarding capability; one driver regarding capacity; and three operational risk drivers: make money appropriately, spend money effectively, and maintain and enhance relevance for stakeholders.
Global Head of Financial Reporting, Funds Administration Operations, Citigroup
5 å¹´Spot on Simon Topping. An amusing take on real challenges facing 'Staid' and 'old fashioned' financial institutions.