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Risk Management & Regulatory Compliance, Capability Delivery, Governance & Policy

2 minute read

Seeking to optimize your risk-taking? Get your policies in order first

May 26, 2022

Written by: Laurent Robert

The heart of an organization is within the policies that declare what it is and what it believes. To many people, those policies are about setting limits, which automatically means minimizing risk because there’s not much room to step out of line.

I’m not one of those people.

I look at developing policy documents that allow a bank to confidently seize opportunities. When you have effective guardrails in place, coupled with a well-managed and risk-aware culture, your bank can optimize the risk it takes for the best benefit.

In a recently published article in the Journal of Financial Compliance (Vol. 5, No. 3), I discuss how these living policy documents can become a foundational advantage for your bank.

Consider that during more than two years of pandemic conditions, banks faced significant pressures on their conventional policies in tandem with both consumer and commercial customers’ facing financial burdens. On top of that came the rise of the social justice movement, demonstrating that another unprecedented risk event is just around the corner.

These policy documents make you ready for those moments by serving as the core of an effective risk management framework:

  • Governance: This sets the ground rules for how you’ll govern the daily risk that comes with simply doing business, including your risk strategy, leadership and board functions and escalation process for reacting smartly and quickly when any issue emerges.
  • Operating Model: Define who within your first, second and third lines of defense has which responsibilities, with each role clearly differentiated. Remember, every employee holds responsibility for identifying, assessing, mitigating and monitoring risk.
  • Standard Framework, Definitions and Taxonomies. Get everyone on the same page with a shared language and structure for defining and assigning risk ratings.
  • Risk Appetite: Your bank needs to determine upfront how much risk it’s willing to take on and still protect its customers, bottom line and reputation.

In the article “Developing living policy documents that optimize risk taking,” I also delve into pitfalls that might trip you up in writing policy documents, starting with failing to clearly define the activity and its main drivers. Ultimately, these documents are only as effective as the level of investment and attention that your organization gives them.

Increased risk with consumer equity and fairness

Spinnaker also published “Assessing and managing UDAAP risk in the new regulatory environment” in the same issue of the Journal of Financial Compliance. Our article explores the challenges that banks will face as the Consumer Financial Protection Bureau increases its attention on compliance with unfair, deceptive or abusive acts or practices (UDAAP). This has long been a subjective assessment, but the CFPB ultimately holds the discretionary power. Again, on top of the global pandemic and social justice, we look at issues of consumer equity and fairness and recommend best practices for banks to better manage UDAAP risk.

Comprehensive approach to risk management

Our Spinnaker team brings front-line experience and leadership in risk across financial services, allowing us to apply our expertise in tailored ways to better position you for a rapidly evolving regulatory environment. Check out our thought leadership on two critical industry topics and reach out to learn how we can help you implement the best practices to turn risk management and compliance into your market advantage.