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Deloitte: The Future of Strategic Risk Management in Financial Services

Core Content

The financial services industry is undergoing significant transformation due to evolving regulatory requirements, increasing geopolitical risks, and the rise of financial technology (FinTech) firms. This shift is compelling traditional financial institutions to innovate and adopt more customer-centric strategies. However, innovation must be balanced with robust strategic risk management to avoid potential disruptions to business strategies and long-term value.

Strategic risk refers to the risk of disruptions to the assumptions underlying an institution’s strategy. Unlike traditional financial risks, strategic risks are not inherently negative and can offer upside potential. The aim of managing these risks is not only to prevent harm but also to anticipate and understand them to guide strategic decisions effectively.

Main Points

• Regulatory Focus: Regulators are increasingly emphasizing non-financial risks, including strategic, operational, and compliance risks. This shift is driven by the recognition that strategic risks are a leading cause of value loss and market capitalization declines.

• Strategic Risks Categories:

  • Strategic Positioning Risks: Assessing whether the institution is positioned correctly in the market and aligned with future customer needs.
  • Strategic Execution Risks: Evaluating the institution's ability to implement its strategy effectively, including talent, technology, and partnerships.
  • Strategic Consequence Risks: Identifying potential unintended consequences of strategic choices, including new risks and inappropriate incentives.

• Modernizing Risk Management:

  • People: Risk management teams must develop new competencies and competencies, with CROs taking accountability for strategic risk.
  • Three Lines of Defense: A formal model where business units own risks, risk management provides oversight, and internal audit ensures effectiveness.
  • Technology: Advanced tools such as machine learning, big data, and natural language processing can enhance the ability to monitor and manage strategic risks.

• Strategic Risk Processes:

  • Strategic Planning Integration: Embed strategic risk review into the annual planning process, aligning with risk appetite.
  • Scenario Planning: Helps organizations explore potential future scenarios, identify risks and opportunities, and test strategic choices.
  • War-Gaming and Simulation: Enables organizations to rehearse and test responses to strategic challenges in a realistic environment, improving decision-making and crisis preparedness.

Key Information

• Strategic risk management is essential for financial institutions to navigate the uncertain and evolving landscape.
• Deloitte’s research shows that strategic risks are the top cause of value loss, surpassing operational, legal, and financial reporting risks.
• Financial institutions need to move beyond traditional risk management practices to a more integrated and forward-looking approach.
• Effective strategic risk management requires governance structures, stakeholder alignment, and new methodologies such as scenario planning and simulation exercises.

Conclusion

The future of risk management in financial services lies in the integration of strategic risk into core decision-making processes. By adopting a more proactive and holistic approach, financial institutions can anticipate changes, manage risks effectively, and seize opportunities for growth. This transition requires investment in new competencies, tools, and organizational structures, but it is crucial for long-term success and resilience in the industry.

Recommended Steps for Financial Institutions

• Coordinate across stakeholders responsible for strategy and risk management.
• Assign a senior executive to be accountable for strategic risk management.
• Establish "owners" for specific strategic risks (e.g., geopolitical, economic, FinTech).
• Train risk leaders in forward-looking approaches such as scenario planning and simulation.
• Integrate strategic risk review into annual planning and major initiatives.
• Link strategic decisions to relevant risk metrics and rating criteria.

Contacts

• Edward Hida: Deloitte Risk and Financial Advisory, ehida@deloitte.com
• Michele Crish: Deloitte Risk and Financial Advisory, mcrish@deloitte.com
• Keri Calagna: Deloitte Risk and Financial Advisory, kcalagna@deloitte.com
• Ronnie Saha: Deloitte Risk and Financial Advisory, rosaha@deloitte.com
• Kelly Bissell: Deloitte Risk and Financial Advisory, kbissell@deloitte.com

Endnotes

• Deloitte's "Value Killers" analysis highlights strategic risks as the primary cause of value loss.
• The US Federal Reserve has proposed guidance for strategic risk governance and ownership.
• Further insights can be found in Deloitte's reports on the future of risk and non-financial risk management in financial services.