Operational Resilience: Why it Should Be at the Center of Your Risk Strategy

Introduction

The banking and financial services market is no stranger to disruption and crisis. The Great Financial Crisis of 2007-09 resulted in some far-reaching structural and regulatory changes across the sector. But no one could have anticipated the events of 2020-21. Even as the COVID-19 pandemic wreaked havoc, the world also had to contend with political upheavals, social unrest, economic slowdown, and significant market dislocation. Banks and financial institutions across the world were faced with an unprecedented crisis that impacted them at different levels. On the one hand, there was revenue loss as interest rates plummeted and bad loans increased. And on the other, there was the sudden need for remote working, social distancing which put significant pressure on established branch infrastructure and ways of functioning.

The Euro STOXX banks index slumped by 40.18 percent while STOXX North America 600 banks index saw a 31.23 percent decline and STOXX Asia/Pacific 600 Banks Index went down by 26.09 percent between December 2019 and April 2020. Through all the chaos and disruption of this year, one thing is evident. The banking sector must relook at its operational resilience strategies and integrate them with their risk management roadmap.

Why is Operational Resilience Important?

The Basel Committee defines operational risk as “the ability of a bank to deliver critical operations through disruption.” And earlier this year they issued seven guiding principles for establishing an operational resiliency framework. These are comprehensive and build on already established guidelines for resilience and continuity. In my opinion, this is the most important aspect of creating and deploying operational resiliency strategies at this point in time. Most banks had resilience frameworks and continuity plans in place even before the pandemic hit. But the circumstances 2020-21 meant that they had to rapidly adapt their operational models in response to an evolving situation.

Operational resiliency can no longer be an afterthought, it can no longer be a static policy, and cannot be independent of risk strategies. Going forward it is important for banks and financial services companies to base their operational resiliency frameworks on the fundamental understanding that crisis situations are unavoidable and fluid. So, the strategies they deploy, and the business continuity plan they create must be pragmatic and flexible enough to cope with a rapidly changing risk landscape. The focus now has to be on establishing a comprehensive resiliency framework based on the risk landscape. It should be able to understand the impact of various threats on critical activities and provision for the availability of crucial resources during crises.

The Reality of Interconnected Risks

Risks are interrelated and understanding a risk landscape in its entirety is crucial for successfully navigating an uncertain future. For example, a pandemic-induced economic slowdown can lead to mass unemployment and businesses shutting down. This in turn will trigger not only a slowdown in loans but also a spate of defaults. A comprehensive and continuous risk assessment exercise must be owned by the board of directors or senior management. And their involvement must also extend to periodic reviews, incident reporting and evaluation, and course correction. Banks need to also consider both external and internal risks and understand how operations are interlinked to create an effective plan of action.

Maintaining Business Stability

A robust business continuity plan with controls, processes, and checks is critical to ensure business-as-usual even under the most extenuating circumstances. The framework should also include incident mapping, escalation mechanisms, threshold setting, and quick governance measures around new issues that can disrupt operations. If the bank works with third-party vendors, then a careful evaluation of their resiliency and risk management plans is a good idea. Central to any operational resiliency framework is technology. As the pandemic proved, technology is inextricably tied in with continuity, access, and even business recovery. Data-driven risk assessment models, robust cybersecurity platforms, and alert mechanisms coupled with an effective cloud and product modernization strategy can guarantee the scalability and flexibility banks need to ensure business as usual in times of crisis.

BFSI - Critical Role in Economic Recovery

These are unprecedented times we live in, and they necessitate extraordinary measures. As one of the pillars of global economy, banks have a crucial role to play in the world’s recovery from this pandemic. To do this effectively, banks must remain profitable and innovative in their products and service offerings. Embedding operational resiliency frameworks into the overall risk management plan is a crucial strategic priority to ensure continuity, and to make risk-aware decisions on investments and expansion into new products or territories.

Read more:

1. Moving From Risk to Resilience – Make Your Organization ‘Anti-Fragile’ (Click here to download)

2. Essential Elements of a Successful Integrated Risk Management Program (Click here to download)

3. Robust Risk Management is a Lot About Mind Games (Click here to download)