Enterprise Risk Management for Banks

Recessions. Housing bubbles. Inflation. Great resignations. These are just some of the economic upheavals that negatively impact the financial sector. But none of them account for a major factor that is involved with enterprise risk management for banks: fraud. 

As banks go online, they increase risk exposure for identity theft, document fraud, and other scams fraudsters use to steal from financial institutions. 

Digitization of financial processes makes enterprise risk management for banks more crucial than ever. In this guide, we'll uncover what ERM is and how you can implement a plan to safeguard your bank from fraud risks. 

What is enterprise risk management (ERM)?

Enterprise risk management (ERM) is an approach organizations use to identify, assess, manage, control, and mitigate risks to achieve their business objectives. The goal is to protect the organization's portfolios, activities, and assets from risks, such as unauthorized access, theft, and damage. 

What’s more? Banks must adhere to regulatory compliances, as well. 

Without necessary risk management and compliance governance, banks risk expensive setbacks or even bankruptcies (an example would be what happened during the 2008 economic downturn). 

A strong enterprise risk management strategy enables you to reduce the odds of unforeseen risks and compliance failures taking down your organization. 

What's the difference between risk management and risk governance?

Risk governance covers the "what" in a bank's strategy is needed to prevent risk. Risk management covers the "how" in ensuring these risks are prevented. 

For instance, a bank's ERM governance process may uncover the need to reduce application fraud. So the risk management plan then might require adopting a platform like Inscribe to detect more fraud and automate the processing of applications. 

What are the benefits of ERM? 

The primary benefit of ERM is to safeguard your organization from potential credit risks like fraud, cyber attacks, and operational hazards. Done right, it can prevent financial losses, reputational damage, and legal matters. 

But that's not all. Here are several other benefits of enterprise risk management. 

Improve risk awareness

New threats appear in the financial industry daily. If you're not reassessing the market and how it can impact your organization, you risk falling prey to overlooked dangers. 

Your organization should run risk assessments regularly to keep an updated ERM strategy. 

Develop standardized risk reporting

Once you know the potential risks facing your financial institution, you can create processes to stop and/or overcome them. ERM helps banks create a better structure, reporting, and analysis of various threats. This empowers stakeholders to make informed decisions regarding risk mitigation. 

For example, identifying the best risk appetite, thresholds, and tolerances without overstepping boundaries. Everything's in one report, allowing management to share information across the company to educate and ensure alignment. 

Comply with regulatory, legal, and reporting requirements

New regulations pass yearly to ensure the security of consumers and organizations. But to make this work, banks must comply with specific regulatory requirements.

For instance, not keeping customer data longer than allowed, or ensuring you're not unknowingly assisting criminals with money laundering.

It takes the right processes and attention to detail. So adopting anti-fraud tools like Inscribe is vital. Not only does it detect fraudulent documents—it also automates document processing and helps you assess the credit risk of applicants.  

Prevent the loss of millions of dollars

The larger the bank, the bigger the investments that are made. This places your financial institution at a higher risk of considerable financial loss. Of course, you do your best to make good credit risk decisions when deciding which loan applications to approve. 

But it's not always easy to see the risk, especially now that applicants submit documents virtually. Catching text overlays, an 0 that’s been changed to an 8, or additional numbers added to an account balance is easier with the help of AI. 

For example, Inscribe spots these discrepancies (often invsible to the human eye) to prevent criminals from defrauding your organization. 

Who's responsible for enterprise risk management?

There's no one person in an organization responsible for enterprise risk management. Instead, a full team effort if you want your ERM strategy to be successful. 

Collaboration of business leaders in the C-suite and department managers is critical. But there should also be a dedicated team responsible for defining the objectives, assessing risks, and ensuring a successful implementation plan. 

The enterprise risk management team oversees the company's high-level risk management initiatives. They also put into place best practices and enforce them across departments.

So, in a sense, your ERM team acts as risk managers.

They effectively mitigate threats stemming from internal operational risk issues. For instance, poor handling of data in the sales department or not following procedures to identify fraud and credit risks in the underwriting process. 

It's also ideal to have an audit committee perform an internal audit to identify security gaps and monitor key risk indicators that lead to inherent risks. The risk management process should be ongoing to ensure effective risk management. 

Maintaining internal controls and understanding market risks provides the 360-degree view that is necessary to make better business decisions.

What is an enterprise risk management framework?

Banks that create an effective risk culture have higher odds of reducing internal and external risks. The company understands its business strategy via comprehensive documentation outlining risk management structures, mechanisms, and systems.

This way, the steps to reduce and mitigate new risks are clear across the organization. It'll also prevent your institution from making the same costly mistake as Wells Fargo. Recently, they paid out $3B in fines because of employee misconduct.

But how do you create holistic risk management? 

By instilling a thorough risk management framework. Here's what it should contain. 

Risk insights and transparency

Risk insights shared across the company make it easier to define the organization's risk/return trade-off. With this understanding, business decisions are easier to make. 

There should be transparency regarding potential market threats, legal problems, and operational crises. And the process should be proactive to ensure new threats are found quickly (vs. only looking at past occurrences). 

Risk appetite and strategy

How much risk is your company willing to take? Some risk is manageable, but too much can lead to financial problems. Defining a risk ratio for your risk portfolio is critical to preventing costly imbalances. 

Select metrics to track risk appetite and develop a solid risk strategy. Create a written risk appetite statement to share across the company to ensure alignment. 

Risk-informed decision making

In the event you face a merger or acquisition, how will you know whether it’s the right move or not? 

Your ERM strategy will clearly outline how much risk the company's willing to take, as well as the company's processes for making these decisions. (For instance, what steps will your company take to identify the level of risk of an investment?)

This strategy should also inform other decisions, detail compliance and conduct, and determine how to manage your people and performance. 

Risk governance and organization

Who's responsible for risk in the organization? What resources do you have to ensure success? You need structure detailing the roles within the ERM team and the resources available (people and finances) to make it work. 

There should be a dedicated chief risk officer and leaders across departments to own risk. 

Risk culture and performance

Risk management doesn't work if the workplace culture doesn't align with it. Introduce your ERM program across the organization early to create a proactive risk culture. 

Your ERM program should guide teams on specific actions to take and milestones to reach to meet company goals. Monitor this closely and be ready to make changes on the fly. 

Risk management in the finance industry is dynamic, requiring adjustments as new threats and technologies emerge. 

To make an enterprise risk management framework for banks, you'll need these four components.

4 components of an ERM framework for banks

The best ERM frameworks evolve just as quickly as the surrounding risks. This requires having documents, systems, and processes to enable your ERM teams to remain robust and agile. 

Let's look at the four elements needed to develop a successful ERM framework. 

1. Risk identification

Review your portfolios, vertices, and operations. You need a complete picture of all risks to gain a strategic perspective. At this point, you can measure risks, their potential impact, and mitigation. 

Some orgnazations even undergo stress tests, disaster tests, and risk modeling to get a better understanding and develop their risk strategy.

2. Risk assessment 

Performing risk assessments identifies the level of impact each risk may have on your organization — which also helps you determine the best steps to maintain a healthy risk appetite. 

At a bank, this includes using credit reports and other data points to identify high-risk applicants. Then you can decide which applicants are too risky for you to approve. (For example, maybe you'll accept customers with a low credit score if they have a thin file, but won't accept low scores from folks with a long history of missed payments.) 

This makes it critical to detail how to assess risk, so it's clear who you’re able to accept and who you need to deny. Outside of writing out various scenarios, you can calculate residual risk. 

Then you can have a scoring system that allows underwriters to calculate risk and determine who's approved or denied. This might include subtracting the quality of risk management score from the inherent risk score (e.g., inherent risk score minus the quality of risk management equals residual risk score). 

3. Risk response

When risk presents itself, what will you do to mitigate it? The goal of banks is to minimize risk across all vertices. But this doesn't mean you won't still face threats—you'll need a plan to counter them successfully. 

In the banking sector, you can do three things:

1. Create credit risk policies to identify and assess credit risks during the approval process. This should detail the approval of large-dollar transactions, product eligibility, and portfolio segmentation. 
2. Develop standards for origination and acquisition of loans, so underwriters know how to appraise, underwrite, and select investments. 
3. Determine how you'll manage loan admin and investment portfolios. Identify operating procedures for dealing with loan and investment issues involving credit deterioration (e.g., working with customers going through financial hardships). 

4. Risk monitoring 

Your strategies for identifying and mitigating risks are in place. Now, it's time to keep a close eye on everything to maintain control. The goal is to ensure processes are smooth across departments, and that risks stay to a minimum. 

If risks are seeping through loopholes, you'll see and address them before it harms the organization. 

The key is being proactive in searching for problems before they wreak havoc. So continue to watch your processes and systems to ensure their effectiveness. 

Mitigate risks with an ERM strategy powered by AI

The banking industry thrives on taking calculated financial risks, as investing in people and businesses fulfills life goals and fuels the economy. 

But this doesn't mean banks should lend without caution. If there's one thing banks learned from the 2008 housing crash, it's caution.

And a part of this is detecting and preventing fraud. Document fraud is often invisible to the human eye. Machines can perform checks with superhuman accuracy and speed. Inscribe looks for signs of digital tampering, compares identity against blocklists and known fraud databases, and uncovers evidence of common forgery techniques to name a few.

You can also save time and resources by streamlining your team’s most tedious tasks. Inscribe will automate parsing, classification, and data matching on application documents via our easy-to-use API   — making it easy to streamline your account opening or underwriting processes, and ensuring you remain compliant.

With premium security features and compliance certifications such as SOC 2 Type II and ISO 27001, Inscribe puts your security, privacy, and risk management first. 

Inscribe catches more then $80M in fraud per month and saves customers 200+ hours on manual document reviews. If you're looking to mitigate risk from fraud, then get started with Inscribe today.