Future of risk enterprise: toward growth and competitive advantage in financial institutions by Vijayaraghavan Venkatraman & Pradipta Niyogi

future of risk enterprise: toward growth and competitive advantage in financial institutions

by Vijayaraghavan Venkatraman & Pradipta Niyogi

introduction

The world has changed—recent events and changing global dynamics will leave a lasting impact on all walks of life. The banking, financial sector and insurance industry is not immune to this, even more so as it forms the bedrock of financial stability while enabling global trade and commerce. Change brings risks, and governing bodies often respond retrospectively albeit in a forward-looking fashion leading to enhanced regulations and compliance obligations.

Traditionally, the risk and compliance function has always been driven by protection and mitigation. However, increasing and fast-changing customer preferences, market and business model disruptions, operational stresses, geopolitical challenges and compliance needs are underscoring the need for firms to look at risk and compliance management as a catalyst for sustaining and accelerating the growth of business and its ecosystems.

In this article, we examine the emerging priorities of financial institutions’ chief risk and/or compliance officers’ (CRO/CCO) functions, their response to changing imperatives, and how business strategies, processes, controls and digital technologies are being recalibrated to stay ahead of the curve.

In August 2021, we surveyed the risk and compliance functions of more than 60 diverse financial institutions and garnered some interesting insights.1 The CRO’s role has become increasingly broad, linking various parts of the business as well as providing a quantitative superstructure to organization strategy, operational management, and financial and actuarial analytics. Additionally, the CRO needs to focus on the impact of operational risks of new digital strategies and infrastructure as well as risks arising from data security and privacy, financial crime including cybercrime, fraud, misconduct, and culture and external partners.

insights

1 / Future of Risk Enterprise: Towards Growth and Competitive Advantage, TCS-Chartis Survey Report

For more information, please contact: pradipta.niyogi@tcs.com

The emphasis on core financial risk will continue—credit, market and liquidity risk management remain top priorities. Businesses are becoming integrated and scaling to serve varied customer preferences. Given increasing competition and innovation pressures, operational and emerging risks are gaining prominence— identifying and quantifying risks, developing futuristic capabilities to manage them, and providing enterprise assurance needed for business model disruptions are becoming crucial. Our study2 indicates that structural changes across risk types have influenced CRO focus toward:

• Commercialization of risk capabilities via working relationships with clients and third parties — varies from 18% to 55%

• New, trained personnel for enterprise controls, KRI-based monitoring and early warnings – varies from 22% to 33%

• Centralization and utilization by encompassing all areas of the enterprise – varies from 5% to 57%

CRO functions in FIs are now increasingly focused on building a next-gen Smart Risk Enterprise to help define and execute business strategies via value-centric programs which will sustain and strengthen the financial and operational resilience and longevity of the enterprise. However, our survey reveals that accomplishing this comes with its own set of challenges (see Figure 1).

Figure 1: Key Challenges to Building a Relationship between Risk and Business

Source: Future of Risk Enterprise: Towards Growth and Competitive Advantage, TCS-Chartis Survey Report

2 / Future of Risk Enterprise: Towards Growth and Competitive Advantage, TCS-Chartis Survey Report

For more information, please contact: pradipta.niyogi@tcs.com

the way forward

Our survey reveals (see Figure 2) that there is traction from risk functions of financial institutions, to drive growth and competitive advantage through business outcomes. An efficiently structured and integrated Smart Risk Enterprise can generate substantial value for firms. It enables multiple levers with the ability to:

• Drive customer-centric outcomes

• Maintain and improve firms’ credit rating

• Manage investment and liquidity risk, achieve portfolio optimization

• Ensure better predictive capabilities and quantification of inherent risk impacts

• Enhance efficiency in compliance risk management, controls, and control assurance

• Enable clearer and topnotch reports to the C-suite for interventions

• Facilitate appropriate benchmarking of managerial decision-making quality

Figure 2: Role of the risk function in driving competitive advantage

Source: Future of Risk Enterprise: Towards Growth and Competitive Advantage, TCS-Chartis Survey Report

The role of the CRO and CCO has evolved through the last decade and has begun to see specialization. While the use of data and analytics has been at the forefront for post-facto analysis for specific risks and risk-based business strategies, the focus was on portfolio exposure management, capital allocation, and hedging. As firms continue to operate in a digitally hyper-connected economy with ecosystem business models, CROs need to broaden their focus to include operational and emerging risks such as climate, ESG, cyber, conduct, model and reputational risks. Complexities multiply due to dichotomies related to specific strategies in a department or function potentially resulting in conflicting risk linkages in another.

This necessitates a holistic approach to the risk and compliance function that is purpose- and business outcome-driven, customer-centric, while ensuring compliance with regulatory obligations. Such an approach can enhance operational resilience, support changing market and business model disruptions, and generate exponential stakeholder value. Our survey revealed certain key risk and compliance capabilities that financial institutions are prioritizing (see Figure 3) to gain competitive advantage. To successfully meet the conflicting demands of balancing risk mitigation and fueling business growth, we believe that financial institutions must adopt a broad set of tools, methodologies, and robust operating models and frameworks.

Figure 3: Risk and compliance function - target state capabilities

Source: Future of Risk Enterprise: Towards Growth and Competitive Advantage, TCS-Chartis Survey Report

enabling a smart risk enterprise

In our view, building a smart risk enterprise will entail transitioning to a nimble operating model (see Figure 4) with the ability to garner real-time and near real-time visibility of exposures and facilitate quick and insights-driven decision-making. In addition, effective integration of digital technologies, processes, and methodologies across the enterprise as well as with external stakeholders across the value chain will be key.3 To maximize the value generated by the risk function, firms must pay as much attention to the way it is implemented as to the linkages to transactional systems and business processes as well as the core risk systems.

The CRO will continue to be a key stakeholder in delivering business outcomes and meeting regulatory obligations in financial institutions. Along with other C-suite executives, the CRO and the risk function will play a critical role in helping financial institutions negotiate an increasingly volatile playing field.

Figure 4: Smart risk enterprise of the future - capabilities and building blocks

Source: TCS, Smart Risk Enterprise in Banks: Toward Competitive Advantage and Growth

the bottom line

3 / TCS, Smart Risk Enterprise in Banks: Toward Competitive Advantage and Growth, https://www.tcs.com/smart-risk-management-banking

authors

Vijayaraghavan Venkatraman (Vijay)

Global Head, Risk Management Vijayaraghavan Venkatraman (Vijay) is Global Head, Risk Management and Regulatory Compliance, Banking, Financial Services, and Insurance (BFSI) unit at TCS. He has over 23 years of experience in banking, risk management and regulatory compliance. Vijay has worked on several global risk and compliance engagements for various banking and financial services clients cutting across risk transformation, data science led innovation in risk and compliance and regtech based regulatory compliance implementations.

Vijay holds a master’s degree in Business Administration from Sri Sathya Sai Institute of Higher Learning, Prasanthi Nilayam, India, and a bachelor’s degree in Electrical and Electronics Engineering from the College of Engineering, Guindy, India. He is a GARP certified Financial Risk Manager (FRM), a Project Management Professional (PMP), and holds a CFA charter from ICFAI. Vijay speaks at various risk and compliance industry events and has coauthored white papers on several contemporary risk and compliance themes.

Pradipta Niyogi (Prad) is a Consulting Partner with the CRO Strategic Initiatives group in the Banking, Financial Services, and Insurance (BFSI) unit at TCS. He specializes in consumer banking with focus on customer experience and conduct risk mitigation. Prad has 23 years of experience in implementing strategic transformation initiatives as well as ‘run-the-bank’ projects for global clients and is a key contributor to engagements with customers, partners, and analysts.

He is passionate about diversity and inclusion, coaching, and mentoring, and is an active contributor to various internal initiatives and forums. Prad holds a master’s degree in Quantitative Economics from the Indian Statistical Institute, Calcutta, India.

Pradipta Niyogi (Prad)

Consulting Partner with the CRO Strategic Initiatives group