Overview
In this time of increased volatility, risk management is more important than ever. In a period of global transition and new AI-driven opportunities, financial institutions must rethink their risk management strategies.
To execute this vision, organizations must expand their use of internal and external data to drive sophisticated analytics to characterize trends, quantify business impacts, and support intelligent, action-oriented decision-making in real time.
The evolving global risk landscape
It’s difficult to imagine a world where chaos reigns and governments are left powerless in the face of cataclysmic events—except in Hollywood movies.
Even so, the world today is severely stressed, and we’re facing a turbulent decade to come. Several forces are challenging the global order: the expanding wealth gap, widespread social unrest, geopolitical tensions, pressures from climate change, and emergent technologies, particularly artificial intelligence (AI). And while AI offers exciting new opportunities, its rapid, unconstrained development presents unique threats.
These factors are converging to create an uncertain future, leaving governments, corporations, and business leaders to navigate an increasingly complex risk environment characterized by:
- Rise in consumer prices and general cost of living
- Contraction in credit
- Systemic risks due to geopolitical conflicts
- Limited access to skilled resources
- Continued supply chain disruptions and commodity price inflation
- Climate change transition challenges
- Attacks on data integrity
- Market volatility
The changing scope of risk management
In this time of increased volatility, risk management is more important than ever. If COVID-19 taught us anything, it’s that the failure to anticipate and prepare for catastrophic events can put a serious dent in a company’s business operating model.
So, are businesses ready for the next crisis? The short answer is no. According to the 2023 Global State of Enterprise Risk Oversight Report, a majority of companies described their risk management processes as insufficient and immature.
In particular, the financial services industry has been slow to respond to global shifts. The factors underpinning financial risk management are changing, and financial institutions are not keeping pace. This is partly because, at least in the U.S., banking regulatory agencies have historically implemented reactive policies that focus on fixing past problems while downplaying emerging issues. But the pressure to evolve will continue as banks are forced to incorporate global macroeconomics, increased regulatory demands, and systemic risks such as climate change into their risk management processes.
A new mindset for a new risk environment
Change is happening fast, and if financial institutions want to survive—and thrive—in this period of global transition and new AI-driven opportunities, they need to rethink their risk management strategies now.
Financial institutions that don’t adapt quickly will pay higher costs in the future. For banks, this could mean imminent acquisition or lost market share to competitors. Institutions may be exposed to devaluations and reputational risk, and banks could experience diminished relevance with customers as demonstrated by the recent bank failures due to rapid interest rate changes.
What new mindset do organizations need to adopt when it comes to risk? The future viability of banking relies on a reinvented risk culture guided by three radical principles:
- Reimagine risk and opportunity. Risk must be viewed in the context of the opportunities it is associated with.
- Develop preemptive resilience. Banks need to embrace a greater emphasis on risk prevention, risk avoidance, and exposure identification.
- Champion interconnection. Risk should be reframed as only one small aspect an organization’s internal and external ecosystem.
What does success look like?
To execute this vision, organizations need to exponentially expand their use of internal and external data to drive sophisticated analytics to characterize trends, quantify business impacts, and support intelligent, action-oriented decision-making in real time. Responsible, trusted AI is a crucial lever to help organizations seamlessly harmonize their data.
As global shifts continue, leading organizations will embrace strategies that maximize the AI opportunity to deliver:
- Resilient outcomes with less negative impact and more new opportunities
- Agile business models that can quickly adapt to change and ecosystems that embrace risk-accountable alliances
- Authentic interest in customer-focused services that create quality experiences and generate newfound customer loyalty
- Prioritization of data and analytics as a strategic capability, particularly AI-driven innovation that solves complex problems and delivers business value
- A counterbalance to simplifying investment and risk analysis for short-term monetization
As accelerating global changes force the financial industry to rethink its relationship to risk analysis and management, there will be winners and losers. Adopting a new mindset that views risks contextually to inform business practices and strategic decisions is a critical path for future survival and success. And elevating data and analytics as a domain of strategic importance is truly an imperative.
This is the first in a series of articles that will take a deeper look at important topics impacting the financial industry and how organizations can deliver successful business and financial outcomes using advanced data and analytics.