What Banks Can Learn from Other Industries About Risk and Compliance
Many banks benchmark their risk and compliance practices against those of other banks. This makes sense and isn’t just a financial-sector phenomenon. But a great way of driving innovation and improving efficiency is to look beyond the banking world and towards other industries, such as manufacturing, energy, airlines, retail and hospitality.
There are a lot of lessons that banks can teach other industries, but at a time when the pressure to improve profitability is tremendous, other industries can offer banks tried and tested ways to improve costs, focus on high-quality earnings and enhance competitive differentiation.
Operational Risk Management
To energy companies, operational risks are a critical source of earnings volatility. This was clearly demonstrated in the 2010 Deepwater Horizon oil spill and tsunami-damaged Japanese nuclear power plant that caused widespread damage to the public as well as the profitability and reputation of the companies involved.
While operational risk in banks does not have the same kind of life-and-death implications, it is becoming an increasingly evident source of earnings volatility and reputational harm. High-profile incidents such as the Libor interest rate-fixing scandal and JPMorgan “London Whale” trading loss illustrate the point.
In this regard, banks would benefit from studying the operational risk management practices adopted by energy companies. Many energy companies have established a common operational risk management framework, mapping risks to business processes, creating centralized risk libraries and integrating risk assessments into decision making.
Loss Incident Data Management
Banks may already be tracking loss-event data. But how effectively is this data being integrated, analyzed and leveraged to support decisions in areas like employee training and the adequacy of insurance coverage?
Take customer complaints management. Airlines and hospitality companies focus on gathering complaint data across channels, identifying failure areas and prioritizing process improvements.
Many banks, on the other hand, still have some way to go in this area. In a world where Twitter and Facebook offer a platform for anyone with an opinion, it may not be wise to ignore social media as a rich data source. To mitigate these reputational risks, banks need to find ways to effectively capture customer complaints, analyze trends and leverage this data to shape strategy.
Faced with large and complex supply chains, manufacturing, retail and consumer goods companies have developed some of the most advanced supplier governance practices. Today, they have a range of lean supplier management methodologies, supplier risk analytics, supplier performance scorecards, streamlined supplier audits and inspections, and collaborative supplier corrective actions.
Many retail and consumer goods companies have also set up major consortiums to share supplier information. Fair Factories Clearinghouse, for instance, hosts a platform for multiple retail companies to collaborate on improving factory conditions in its supply chain.
Banks may decide to examine how some of these practices can be applied to their suppliers in critical banking processes such as billing, software development and infrastructure management. The need for effective supplier governance is becoming increasingly important, especially as regulatory bodies like the Federal Financial Institutions Examination Council begin to demand more data on vendor management and monitoring.
Risk and Control Metrics
At manufacturing companies, quality, control and risk metrics are closely linked to each other and to the corresponding manufacturing processes. These kinds of connections are not as common in banks because of their relatively large size and operational complexity. If banks were to map their processes to their risks, their risks to their associated controls and their controls to their control indicators, they would find many redundancies and irrelevancies.
Today, many local regulations, as well as Basel capital requirements mandate that banks link metrics to key risks, scenario analyses and loss events. This data is particularly important in optimizing operational risk capital requirements.
Some banks are going another step further and adopting manufacturing-focused, quality-control methodologies, including Six Sigma, just-in-time processes and Pareto models. Citibank, for instance, has successfully leveraged Six Sigma principles to reduce defects in operations, improve process time lines and increase customer satisfaction.