Operational Risks in Banks: Effective Strategies to Create a Secure Framework

Anusree Bhattacharya | May 2, 2022 | 63 views

Operational Risks in Banks
Risk events in the banking sector and financial institutions can trigger huge losses. Risk events can be managerial, technological, security, and operational. With these operational hazards, the need for protection rises in banks simultaneously. Banks need to function seamlessly, faster, and more accurately in such circumstances.

According to a report by Barclays, prominent banks worldwide have suffered nearly $210 billion in losses from operational risk from 2011 to 2019. Most of these losses were caused by unavoidable errors made by employees and systems when interacting with clients, transactional flaws, and fraud.

Since the global financial crisis, including the pandemic, banks and other financial institutions have become highly observant of their efficient risk management needs. As a result, banks can use techniques to anticipate and fix risk events before or at the right time. However, some strategic risks or challenges still prevail. Let’s understand what those are first!


Strategic Challenges in ORM

Risk management in banks and financial institutions has always been a complex function. Out of which strategic risks are mostly recorded. What are the most prominent strategic risks that banks usually suffer from?


Large & Complex Data Processing

The processing of large and complex data risks puts banks under pressure to monitor exponentially. Most banks still face the challenge of collating extensive customer data, data inputs, processing, and unreliable and dysfunctional tools, which results in the loss of potential clients and fees.


Inefficient Risk Identification Parameters

Most banks do not have risk management tools like KRIs, KCIs, and KPIs. As a result, they are inefficient and do not have a holistic view of the data, which leads to inappropriate risk identification. Further, most banks also do not have consistent risk management protocols across their business, which poses a significant risk to the operational infrastructure of those banks.


Loss of Data Management

Loss of data is also an essential risk that banks face several times. Data management is an integral part of the banking operation, which means it needs core risk management strategies to keep it secure. Data management includes several functions, but the most essential is maintaining data records securely. This is one of the prime risks that banks, even today, keep a close eye on.


The Current State

While banks have been aware of operational risks, they need to be prompt in adapting risk management capabilities and tools to eradicate the complexities and introduce smoothness in the workflow. Currently, banks have developed taxonomies on risk-identification and risk-assessment processes, extensive controls through cloud support, and cyber and control-testing procedures.

While the banking industry practically succeeded in reducing the industry-wide regulatory system, there are now fewer losses from operational risks in banks.

"In financial services, if you want to be the best in the industry, you first have to be the best in risk management. It's the foundation for every other measure of success. There's almost no room for error."

John Stumpf, chairman and CEO of Wells Fargo

Integration of ORM Strategies


Evaluate Risk Profile

Every financial institution and bank should assess their risk profile to reduce operational risks and improve information security. It should also evaluate the resilience of its business processes, map them to associated risks and controls, and build a database of potential operational risk events. To facilitate this under operational risk management, deploy analytics into the process and evaluate potential threats at a particular time. In this way, banks can minimize risk factors in the future.


Introduce Risk Indicators

Most banks examine their sales-operating models meticulously because of regulatory concerns about sales practices, such as product features, incentives, sales procedures, frontline-management routines, and customer-complaint processes.

Risk management in the banking sector can now be possible as banks can enhance their operational risk coverage with the help of the ‘three lines of defense” model. This model is widely used to define and manage operational risks. It is a solution framework that functions at a granular level to help identify and control risks. The target framework should include sources of risk that most banks lack, such as:

  • A clear definition of accountability at each level of the risk plan
  • Established levels of communication and feedback from various levels of management
  • Uniform monitoring of all potential risk exposure sources, such as portfolio management, employee tracking, or even disaster management

The key objective for banks is to move beyond legal risks and focus on all business processes to ensure they are covered fully for the future.


Initiate Training for Employees

Employees play an integral role in managing operations in banks and financial institutions. Therefore, to ensure the effectiveness of the same, employees can be given training on operational risk management programs and functions of management programs to make them aware of the potential risks and ways to overcome them. This is extremely important for those banks and financial institutions looking to launch a new customer interface, roll out new products or services, or adapt new business processes with technology implementation.


Asset Management

Asset management is one of the essential parts of operational risk management in banks and financial institutions. So, for asset management, bank managers should be concerned about two major things—the role of asset management and how to develop a good plan for managing assets. Asset management identifies and manages risks that arise when certain assets are used.

To exclude risks in bank operations, a fundamental strategic asset management plan will include the following six phases:

  • Acquisitions (including leases or rentals)
  • Operations
  • Maintenance
  • Funding
  • Risk assessment and management

After these phases have been covered, banks must count their assets. Here is the following inventory of assets that need to be included. They are:

  • Total count of assets
  • Allocated assets
  • The value of each asset
  • Details of acquired assets
  • The expected life cycles of the assets

Banks can easily implement a robust risk management plan for future safety by accessing all of them.


A Comprehensive Approach to ORM

Banks taking a comprehensive approach toward building an ORM (operational risk management) framework can bolster business growth rapidly. The first step to creating a productive ORM capability is to access the existing risk potential in banks. This would help banks create a base out of all internal and external risk events. Then, to deal with the different types of risks, the development of key risk indicators (KRI) will serve as early warning signals to potential risks. Once the banks successfully identify it, they can decide on mitigation options.

Next, the question arises, how can financial businesses and institutions establish a robust ORM for risk management in the banking sector? The key to establishing an effective ORM is training employees to anticipate future risks, especially during the launch of products, changes in customer interface, outsourcing services, or shifting the core of a business module.

As banks and other financial institutions have embraced agile work modes, ORM experts have become an integral part of the operation. Like, JPMorgan Chase, ORM lies at the heart of all its processes. It is where the bank develops and tests new business offerings and practices to check the potential risks in the following. In addition, other U.S. banks have built a dedicated cyber-risk team that simulates attacks and takes action to prevent potential operational risks.

However, identifying and alleviating operational risk is a significant and crucial task that needs to be left only to the ORM experts.


A Move Forward with the Operational Risk Management Framework

The components of risk management in banks examined above have proved beneficial for the operational risk management function.

Operational risk management in the banking sector should ensure that an institution's operational risk framework is reliably implemented and performs well. The institution should ensure that the framework provides thorough coverage across the various operational risk event types and conduct ongoing support for individual components and the overall operational risk framework.

Businesses and financial institutions should leverage the operational risk management framework as part of a broader effort to improve sustainability, including estimation of forecasting efforts. Therefore, the operational-risk discipline can create a more secure and profitable institution in the future.

"The art of banking is always to balance the risk to run with the reward of a profit”

Jamie Dimon, chairman and CEO of JPMorgan Chase

Frequently Asked Question


What are the most prominent operational risks in banks?

Process risk, systems risk, external event risk, and legal and compliance risks are the significant operational risks in banks.


What is the primary function of operational risk management?

The primary function of operational risk management is to reduce risks through risk identification, measurement and mitigation, risk assessment, monitoring and reporting.


How to identify operational risks in banks?

Banks must assess and manage operational risk using various tools and strategies. Banks identify potential operational risks in the following ways:
  • Business disruptions and systems failures
  • Accounting or data entry errors
  • Inaccurate client records

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UiPath Empowers Sumitomo Mitsui Trust Bank to Improve Operational Efficiency and Risk Management

UiPath | July 19, 2022

UiPath (NYSE: PATH), a leading enterprise automation software company, today announced that Sumitomo Mitsui Trust Bank, Limited has deployed the UiPath Platform, resulting in savings of more than 400,000 total hours in labor-intensive tasks. Over four years, the UiPath end-to-end automation platform has enabled the bank to successfully automate more than 250 critical business operations. As the largest trust bank in Japan, Sumitomo Mitsui Trust Bank manages the property and investment assets of a wide base of individual and corporate clients. Given its diverse and complex business scope, the bank saw the potential in using robotic process automation (RPA) technology to improve the efficiency of its high-mix low-volume operations. In 2018, the bank embarked on a journey with UiPath to streamline and automate time-intensive tasks, improve risk management and enhance customer experiences. Empowered by the UiPath platform, the bank has successfully leveraged enterprise automation across multiple workflows and business operations to support the rapidly changing and unique demands of its customers. Together, UiPath and Sumitomo Mitsui Trust Bank have enabled: Automation of over 250 business operations and 500 workflows with UiPath Orchestrator With UiPath Orchestrator, an automated workflow management tool, the bank has created over 500 workflows and automated more than 250 operations, enabling its employees to work more efficiently and productively. Over 400,000 hours have been freed up for employees to work on more value-added tasks. This allows the bank to easily manage heavy workflows without deploying additional resources. Sustainable scaling of automation with UiPath Test Suite Recognizing the value of RPA technology in automating existing processes, the bank plans to automate more labor-intensive tasks. With UiPath Test Suite, Sumitomo Mitsui Trust Bank is currently working on a plan to proactively test applications before deployment and ensure that existing workflows are consistently improving. Apart from RPA needs, the bank is also leveraging UiPath Test Suite to develop overseas accounting system, enabling enterprise-wise automation. Improved business process standardization and enhanced risk management Trust banking is very complex and often not covered in manuals. To support the complex business processes, the bank uses UiPath Process Mining, an automation discovery tool, that analyses and tracks these unique business processes, and simplifies compliance requirements. The tool delivers end-to-end visualization of business processes for each user, enabling the bank to identify bottlenecks, risks, and other workflow inefficiencies, zoom in on opportunities to optimize processes, and enhance risk management. Swift collection of survey results Having shifted towards online seminars during the COVID-19 pandemic, the bank needed a swifter method of collecting survey responses after each seminar. With UiPath, the bank is automating the collection and dissemination of large quantities of survey results to the relevant departments, reducing time taken from five hours to just 30 minutes. Looking ahead, Sumitomo Mitsui Trust Bank plans to further leverage the power of automation for targeted distribution of marketing materials and proposals to customers. In doing so, the bank hopes to establish a single integrated process for data acquisition, formatting, processing, accumulation, and analysis, utilizing artificial intelligence and business intelligence technologies. About UiPath UiPath has a vision to deliver the Fully Automated Enterprise™, one where companies use automation to unlock their greatest potential. UiPath offers an end-to-end platform for automation, combining the leading Robotic Process Automation (RPA) solution with a full suite of capabilities that enable every organization to rapidly scale digital business operations.

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CORE BANKING

Customized Business Support: Regions Bank Announces Commercial Corporate Finance Team

Regions Financial Corporation | July 08, 2022

Regions Bank on Wednesday formally announced the establishment and continued business growth of a Commercial Corporate Finance (CCF) team that is connecting business leaders with specialized resources, insights, and guidance on opportunities including ownership transitions, financing alternatives, and risk management. The team is led by Coulter Warlick, who joined Regions in 2021 to develop and launch this team. “The Commercial Corporate Finance team is positioned to further enhance and expand Regions’ financing capabilities as we serve Commercial Banking clients with complex capital needs,” said Brian Willman, head of Commercial Banking for Regions. “The Commercial Corporate Finance team is positioned to further enhance and expand Regions’ financing capabilities as we serve Commercial Banking clients with complex capital needs,” said Brian Willman, head of Commercial Banking for Regions. “Our work starts with building a deep relationship with the client, understanding their opportunities and challenges, and developing tailored solutions. This team works hand-in-hand with commercial bankers across our footprint to provide specialized experience and insights. It’s another way we are creating greater value for existing clients – and for prospects who can benefit from a more customized approach to banking.” Additional focus areas for the CCF team include growth capital, management buyout needs, loan syndications, M&A opportunities, dividends, recapitalization and more. Warlick’s team provides guidance, structure, and support from concept through completion. “Amid the current volatility in the economy, companies especially value a banking relationship that helps them navigate the issues of today while keeping their long-term objectives within reach,” Warlick said. “At Regions, our relationship-driven model of service aligns with the needs and preferences of today’s business owners and managers. Working with our commercial bankers, the Commercial Corporate Finance team can be a trusted source of additional guidance in helping business leaders with customized solutions to meet their financial goals.” Warlick joined Regions from South State Bank, where he served as director of Middle Market Banking and developed a team of bankers serving mid-sized businesses throughout the Southeast. He previously worked at SunTrust Robinson Humphrey. Warlick began his banking career at BB&T in 2005. Warlick earned a Bachelor of Arts in Economics from the University of North Carolina at Chapel Hill. He currently chairs the board of directors for Furman University’s Bridges to a Brighter Future Program Scholarship Fund. In addition, Warlick serves on the executive leadership team of the Alzheimer’s Association of Charlotte, and he recently completed service on the board of directors for Classroom Central, a nonprofit focused on serving teachers and students in Charlotte. About Regions Financial Corporation Regions Financial Corporation (NYSE:RF), with $164 billion in assets, is a member of the S&P 500 Index and is one of the nation’s largest full-service providers of consumer and commercial banking, wealth management, and mortgage products and services. Regions serves customers across the South, Midwest and Texas, and through its subsidiary, Regions Bank, operates approximately 1,300 banking offices and more than 2,000 ATMs. Regions Bank is an Equal Housing Lender and Member FDIC. Additional information about Regions and its full line of products and services can be found at www.regions.com.

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PAYMENTS

Finastra and Uni Systems Work Together To Provide Treasury, Payments, and Risk Management System Services

Finastra | June 23, 2021

Finastra has formed a new collaboration with Uni Systems Information Technology S.M.SA (Uni Systems), an Information and Communications Technology (ICT) systems integration firm specialising in European IT landscapes transformation. Uni Systems will provide on-the-ground installation and support for Finastra treasury, risk, and payments software – Fusion Treasury, Fusion Risk, and Fusion Global PAYplus, respectively – in local markets. According to Constantine Serros, Director of the Banking and Financial Services Commercial Unit at Uni Systems, "We are pleased to announce our new business relationship with Finastra. Finastra, as a worldwide leader in the fintech field, provides extensive expertise as well as leading solutions in the domains of treasury, payments, and risk, which we want to exploit even further with our local footprint, knowledge, and technological integration skills. We are certain that this collaboration will assist European financial institutions on their road to digital transformation - a vision shared by Finastra and Uni Systems." Customers will benefit from local experience and high-level professional services, in addition to Finastra's proven technological solutions, as a result of the relationship. It serves clients in a variety of European countries, including Greece, Cyprus, Malta, Romania, Bulgaria, Albania, North Macedonia, Serbia, Croatia, and Slovenia. Finastra's General Manager, Treasury, Capital Markets, and Risk, Michael Henssler, stated, "Uni Systems is an intriguing new partner in our Fusion Orbit initiative. With this partnership, we want to reach new markets throughout Europe. Uni Systems' specialist consultants are now trained and qualified to provide our solutions, both in the cloud and on-premise, and we are certain they will provide our clients with superior professional services." About Uni Systems Uni Systems, a Quest Group company, has been a long-standing strategic ICT partner to financial institutions, government organisations, telecom carriers, businesses, and institutions in the European area since 1964, offering integrated solutions and value-added services. Today, the Company invests heavily in its European strategy and has a track record of success in difficult and important IT projects in over 26 countries via its subsidiaries in Belgium, Romania, Luxembourg, Italy, and Spain. About Finastra Finastra is developing an open platform to speed cooperation and innovation in financial services, resulting in improved experiences for individuals, businesses, and communities. Finastra offers this critical technology to financial institutions of all sizes throughout the world, including 90 of the world's top 100 banks, and is supported by the widest and deepest portfolio of financial services software. Our open architectural approach brings together a diverse group of collaborators and innovators. Together, we are paving the path for financial services apps to be built, deployed, and consumed in order to adapt in response to changing client demands.

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