Confronting the Unknown: How Financial Institutions Can Manage Emerging Risk

Financial firms are facing new categories of risks—risks over which they have no control. However, those firms that gain even a slight advantage in detecting and managing these emerging risks can take the lead in the race to achieve high performance.

Accenture outlines the key steps to integrating emerging risk into a firm’s existing risk management framework and embedding emerging risks into an organization’s business planning, execution and evaluation process.

Financial services firms are facing more risk and uncertainty than in the past. These “emerging risks” are often not well understood or measured, but they share common characteristics:

• They are outside the scope that any one organization can address.
• They cross multiple borders and jurisdictions.
• They are linked to other risks.

A number of elements (more effective communications, growing global population and rapid growth in formerly poor countries) have made the world more susceptible to risk. And while companies are not usually in a position to do anything to prevent many of these risks, they can and should plan to minimize their effects.

Due to the systemic nature of emerging risk, and the severe potential impact of such events, companies with slight advantages in detecting and managing emerging risks can obtain significant competitive opportunities. These are not limited to avoiding the devastating effects of the next major event; rather, leading companies are making gains by moving quickly on opportunities presented when emerging risks have materialized.

Emerging risks are set to grow in impact and frequency over the next decade owing to climate change; technology dependence; economic, societal, environmental and political pressures; an increasingly complex global supply network; and global population growth.

Financial services firms also face the challenge of measuring and management events that have never occurred before. In doing so, they face organizational, process and technology demands and challenges.

Accenture believes that emerging risks should be integrated into the existing enterprise risk management framework and embedded into an organization’s business planning, execution and evaluation processes.

A number of key steps include:

• Setting objectives. During the quarterly strategic planning, identify high-level goals related to emerging risk. Review the current list of emerging risks to set or revise tolerance levels.
  
  
• Event Identification. Brainstorming sessions with senior management and with risk managers from the lines of business review the current list of emerging risks and update as required.
  
  
• Risk Assessment. Scenario analysis workshops and event simulations are conducted with subject matter experts to discuss identified risks and assess impact and severity. Interconnections with other emerging risks, and with risks in the existing risk library, are determined. Finally, the impact of external events is further assessed.
  
  
• Risk Response/Control. Risks are assessed either at the risk or the risk category level, and appropriate responses are determined.
  
  
• Information and Communication. Periodic communication of the top emerging risks, monitoring strategies, and planned response strategy is provided.
   
• Monitoring. Previous events are assessed to ensure an accurate picture of the risk landscape. Additionally, key emerging risks are quantified by connecting them to known risks, or by identifying proxy metrics.

Steve Culp is the managing director-Accenture Risk Management. Based in London, he has 20 years of global experience in strategy definition, risk management, enterprise performance management and delivering large-scale finance operations engagements. Prior to his current role, Culp was the global lead for Accenture’s Finance & Performance Management consulting services for global banking, insurance and capital markets institutions. With his extensive risk management and performance management experience and business acumen, he guides executives and their teams on the journey to becoming high-performance businesses.

Fred Kim is an executive director-Risk Management and banking industry lead based in Chicago. He has more than 17 years of consulting and industry experience in financial services and risk management across North America and the United Kingdom. His extensive experience in risk management, business architecture and operating model strategy, credit transformation, and operational efficiency helps executives and their firms become high-performance businesses.

Amit Gupta is a senior manager-Risk Management. Based in New York, he has more than 14 years of risk consulting and capital markets industry experience delivering strategic solutions in a wide variety of client situations. He has extensive experience in assessing market risk and credit risk capabilities and helping clients enhance their risk governance, risk processes, analytics and implementing risk systems. His experience in emerging risk helps clients in their efforts to increase their organizational focus on proactive risk measures and to better leverage their enterprise risk management capabilities on their journey to high performance.