4 ways risk managers at banks are streamlining costs

The global financial crisis (GFC) put incredible pressure on financial institutions to strengthen their risk management practices, leading to significant spending increases over the following years in a bid to tackle systemic problems.

 

Nearly a decade later, the regulatory environment continues to grow more stringent, but a rising number of banks are embarking on efficiency drives to cut costs, including across their risk departments.

 

Despite this, a 2015 Accenture survey revealed that 88 per cent of businesses would be increasing spending on risk management over the following two years, sparking a ‘war for talent’ on specialised skills.

 

Our own research revealed that risk departments still intend to recruit, with only 16 per cent of respondents claiming they are unlikely to add to their ranks in 2017.

 

So, if head counts aren’t on the chopping block, how are risk departments tackling cost pressures?

1. Nearshoring

Nearshoring isn’t a new trend in business, but the world’s biggest banks are taking more of an interest in moving their risk processes to cost-effective locations. Poland is a notable hotspot, with Wroclaw a key destination for major players such as Credit Suisse and UBS.

 

Kate Robu, a partner at management consultancy McKinsey & Co, told the Financial Times (FT) that regulatory settlement costs increased 45 per cent for European and US banks between 2008 and 2014. Meanwhile, operational income climbed just ten per cent.

 

“That is why lots of financial institutions started looking outside their home market and started thinking creatively about how to set up centres of expertise in places like eastern Europe,” she explained.

2. Digitisation and automation

A recent McKinsey article highlighted the importance of digitisation and automation for reducing risk management costs. Once zero-based budgeting and outsourcing avenues are exhausted, organisations must turn to technology for answers.

 

“The risk function can help speed the digitisation of core risk processes, such as credit applications and underwriting, by approaching businesses with suggestions rather than waiting for the businesses to come to them,” McKinsey stated.

 

Additional benefits include greater sales, better customer experiences and improved efficiency.

3. Machine learning and advanced analytics

These technologies are linked to automation, but they deserve a special mention in the area of risk management because of the considerable investment financial institutions are now making into such systems.

 

Monitoring, recording and testing risk is becoming faster and more accurate through artificial intelligence and analytics, with organisations able to identify problems within huge datasets quicker than ever before. Predictive models are used extensively across credit underwriting, collections and as early-warning systems, according to McKinsey.

 

Better identification of fraud and money laundering, meanwhile, can create considerable savings by preventing financial losses and reducing the number of fines and penalties linked to criminal behaviour.

4. Embedding risk management into company culture

Many organisations are beginning to realise that risk management shouldn’t just be isolated to corporate governance departments. Empowering staff, most of whom aren’t risk professionals, to identify and prevent potential problems can ease the burden on the second and third lines of defence.

 

Therefore, banks are investing more money into training the entire workforce, particularly employees who are customer or client facing, to help them spot risks early.

 

One area where this could prove particularly helpful is cyber risks. The 2016 IBM Cyber Security Intelligence Index revealed that 60 per cent of data breaches were due to insider threats, of which 15.5 per cent were due to people inadvertently being duped or failing to follow security policies.

Cutting costs without weakening risk management

Many risk departments are looking to make their operations more efficient by focusing on prevention rather than cure. While banks are hoping to cut costs, spending remains considerably higher than before the GFC.

 

Nicola Crawford, chair of the board at the UK’s Institute of Risk Management, estimated that most banks have increased expenditure in this area by between 30 and 50 per cent since the crisis.

 

Julian Leake, head of Deloitte’s financial services risk advisory practice, told the FT that financial institutions spend approximately 40 per cent more on third-party consulting for risk management advice. He added that risk professionals have also seen a notable rise in their salaries.

 

“A figure that’s been bandied about is a 25 per cent increase in salary and compensation levels in the past five years,” Mr Leake stated.

 

Clearly, the risk management landscape is evolving as banks implement new technologies and introduce structural changes in order to reduce costs and improve efficiency.

 

Nevertheless, demand for skilled risk managers remains high, with Barclay Simpson research showing that 66 per cent of departments feel they are inadequately resourced for the challenges they face.

 

Candidates with strong technical and interpersonal capabilities can therefore expect strong interest in their skills as banks manoeuvre their businesses for the challenges of a post-GFC regulatory environment.

 

Our 2017 Market Report combines our review of the prevailing conditions in the risk management recruitment market together with the results of our latest employer survey.

 

Image: Kenishirotie via iStock