Managing Non-Financial Risks to Build Organizational Resilience in the Financial Institutions Industry

Managing Non-Financial Risks to Build Organizational Resilience in the Financial Institutions Industry
December 11, 2024 6 mins

Managing Non-Financial Risks to Build Organizational Resilience in the Financial Institutions Industry

Managing Non-Financial Risks to Build Organizational Resilience in the Financial Institutions Industry

Non-financial risks are often difficult to predict and quantify, yet present a real threat to financial institutions. In this volatile environment, risk management is playing a greater role in creating business resilience and identifying where capital should be deployed.

Key Takeaways
  1. Organizations must expand their skills and talent to manage today’s rapidly changing work environment. Greater collaboration between CROs and CPOs is a crucial part of a robust risk management framework.
  2. Human capital data and analytics have the potential to turn non-financial risks such as cyber from a reactive to a predictive discipline.
  3. Insurance plays an important role in quantifying and assessing the potential consequences of non-financial risks, giving risk management a more proactive role and higher profile throughout the business.

Daniel Butler, Aon’s Head of Financial Institutions for EMEA, chaired the CRO Panel Discussion on “Managing Non-Financial Risks to Build Organizational Resilience” on Day 2 of RiskMinds International, the world’s leading risk management event for financial institutions. Here we explore the key themes that were raised in the discussion.

Responding to a Changing Work Environment

Since its introduction in 2008, Basel II has driven regulation within risk management in banks. In turn, this has led to increased investment and capital, theoretically making banks more resilient.
However, this regulated landscape has created silos in risk management which have made managing the volatility of today’s world a greater challenge for CROs. 

One potential solution offered by the panel was the process of bringing risk and HR communities together, creating the possibility of predictive analytics in non-financial risk management. CROs have already made strides towards closer partnerships with CPOs, facilitating a deeper understanding of the potential financial impacts of people risks across organizations. Working with CPOs also enables more informed decisions around the talent needed to address key risks.

Closer partnerships between risk managers and the people element of businesses were also identified as the basis of a strong risk culture, which has climbed the list of strategic objectives for financial institutions. The panel discussed the role of this collaborative effort in reminding people that they are at the center of risk. In practice, tabletop exercises are a useful tool to develop firms’ muscle memory when responding to potential threats.

Ultimately, CROs need a better view of risks in whatever shape or form they manifest. Improving organizational resilience amid expanding threats is reliant on a collaborative approach to risk management, with both risk and people functions working towards the development of strong risk cultures.

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We’re working far closer with our HR partners on risk management as every people event has a potential impact on the financial side.

Jason Forrester
Co-Head, CRO CIB, Global Head, ERM & Deputy CRO, SC Bank

Tackling “Known Unknowns” – Including Cyber and Climate Risks

ESG requirements are an ever-growing priority as organizations seek to fulfil net zero commitments. The financial sector has shown enthusiasm for green lending, which is often challenged by the emergence of new technologies and a lack of trading records. The insurance industry is well-placed to provide the necessary expertise to help banks unlock this lending, but financial institutions may be unaware of the extent of support available to them.

Cyber risks are also front of mind for organizations, with the threat of cyber-attacks and data breaches identified as the #1 business risk in Aon’s Global Risk Management Survey. Financial institutions are among those that have witnessed pressure on their cyber framework, exacerbated by remote working and with AI-enhanced hackers presenting an increasingly sophisticated threat. Even a single disruptive event can cause significant damage to brand or reputation as well as the opportunity cost of tackling the disruption.

Against these mounting risks, financial institutions must also look to cooperate externally. Ransomware was given as an example where close cooperation between banks could help to prevent network issues and better defend payments, assets and liquidity.

The panel discussed the potential for human capital data and analytics to turn non-financial risks such as cyber from a reactive to a predictive discipline. Developing an operational view of risks is aided by insights on the key metrics that are available to HR leaders. One example is the location of employees, which plays a large role when considering geopolitical, climate and supply chain risks. 

#1

Cyber-attacks or data breaches are the number one risk for organizations today

Source: Aon’s 9th Global Risk Management Survey

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We need to look at the vast amount of available data and how it can be used to inform our risk decision making.

Davide Alfonsi
Group Chief Risk Officer, Intesa Sanpaolo

Bringing a Risk Lens to Enhance Decision Making

Non-financial risks are real and volatile, yet remain hard to quantify and predict despite improvements in data collection. Harnessing internal and external data provides an opportunity to develop a better view of risk appetite, creating a more strategic and robust risk financing strategy. Developing these strategies is a critical step in making firms more resilient in the wake of unexpected events, and in enabling risk management to play a more active role in product approvals; understanding profitability; and deciding where to deploy capital.

The panel discussed the key challenges to achieving this enhanced decision making, including how a highly regulated environment could slow the implementation of innovative solutions. The importance of risk identification was stressed, yet non-financial risks remain a potentially overlooked area within corporate planning exercises. Greater resilience will come from incorporating non-financial risks within current stress testing frameworks.

Another key consideration was the alignment between risk and reward for both internal and external behaviors. People will remain the greatest area of risk within an organization; data is needed first to identify the behaviors that present risk, and to underpin the right people strategy to reduce potential threats. Externally, financial institutions should consider the resilience of existing frameworks when selecting vendors, as any compromises could impact the strength of their network. 

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You’ll have a better chance of making change and driving growth if you have a risk mindset permeating across the organization.

Raminder Boparai
Chief Risk Officer, Capital Markets and Group Head of Financial & Enterprise Risk, London Stock Exchange Group
Thought Leaders
  • Raminder Boparai
    Chief Risk Officer, Capital Markets and Group Head of Financial & Enterprise Risk, London Stock Exchange Group
  • Jason Forrester
    Co-Head, CRO CIB, Global Head, ERM & Deputy CRO, SC Bank
  • Davide Alfonsi
    Group Chief Risk Officer, Intesa Sanpaolo
  • Lisa Stevens
    Chief Administrative Officer, Aon
  • Daniel Butler
    Head of Financial Institutions EMEA, Aon

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This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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