Overview
In this time of increased volatility, risk management is more important than ever. In a period of global transition and new AI-driven opportunities, financial institutions must rethink their risk management strategies.
To execute this vision, organizations must expand their use of internal and external data to drive sophisticated analytics to characterize trends, quantify business impacts, and support intelligent, action-oriented decision-making in real time.
It’s difficult to imagine a world where chaos reigns and governments are left powerless in the face of cataclysmic events—except in Hollywood movies.
Even so, the world today is severely stressed, and we’re facing a turbulent decade to come. Several forces are challenging the global order: the expanding wealth gap, widespread social unrest, geopolitical tensions, pressures from climate change, and emergent technologies, particularly artificial intelligence (AI). And while AI offers exciting new opportunities, its rapid, unconstrained development presents unique threats.
These factors are converging to create an uncertain future, leaving governments, corporations, and business leaders to navigate an increasingly complex risk environment characterized by:
In this time of increased volatility, risk management is more important than ever. If COVID-19 taught us anything, it’s that the failure to anticipate and prepare for catastrophic events can put a serious dent in a company’s business operating model.
So, are businesses ready for the next crisis? The short answer is no. According to the 2023 Global State of Enterprise Risk Oversight Report, a majority of companies described their risk management processes as insufficient and immature.
In particular, the financial services industry has been slow to respond to global shifts. The factors underpinning financial risk management are changing, and financial institutions are not keeping pace. This is partly because, at least in the U.S., banking regulatory agencies have historically implemented reactive policies that focus on fixing past problems while downplaying emerging issues. But the pressure to evolve will continue as banks are forced to incorporate global macroeconomics, increased regulatory demands, and systemic risks such as climate change into their risk management processes.
Change is happening fast, and if financial institutions want to survive—and thrive—in this period of global transition and new AI-driven opportunities, they need to rethink their risk management strategies now.
Financial institutions that don’t adapt quickly will pay higher costs in the future. For banks, this could mean imminent acquisition or lost market share to competitors. Institutions may be exposed to devaluations and reputational risk, and banks could experience diminished relevance with customers as demonstrated by the recent bank failures due to rapid interest rate changes.
What new mindset do organizations need to adopt when it comes to risk? The future viability of banking relies on a reinvented risk culture guided by three radical principles:
To execute this vision, organizations need to exponentially expand their use of internal and external data to drive sophisticated analytics to characterize trends, quantify business impacts, and support intelligent, action-oriented decision-making in real time. Responsible, trusted AI is a crucial lever to help organizations seamlessly harmonize their data.
As global shifts continue, leading organizations will embrace strategies that maximize the AI opportunity to deliver:
As accelerating global changes force the financial industry to rethink its relationship to risk analysis and management, there will be winners and losers. Adopting a new mindset that views risks contextually to inform business practices and strategic decisions is a critical path for future survival and success. And elevating data and analytics as a domain of strategic importance is truly an imperative.
This is the first in a series of articles that will take a deeper look at important topics impacting the financial industry and how organizations can deliver successful business and financial outcomes using advanced data and analytics.