S1 | E25: Inside Risk Categories: Unraveling the Banking Industry's Core Challenges
In this episode of the "Risk Intel" podcast, host Edward Vincent had the privilege of sitting down with Michael Glotz, the CEO and Co-Founder of SRA Consulting. This insightful discussion centered on the eight critical categories of risk that form the backbone of risk management in banking. Listen, watch or read the summary of the key takeaways from this episode below:
Categories of Risk
Michael Glotz delves into the heart of SRA's holistic risk intelligence platform, SRA Watchtower, which encapsulates eight comprehensive categories of risk. These categories, largely are influenced by regulatory bodies like the Federal Reserve, FDIC, and the OCC, and encompass all aspects of risk in the banking sector. They include:
- Strategic Risk
- Reputational Risk
- Credit Risk
- Liquidity Risk
- Market Risk
- Legal Risk
- Compliance Risk
- Operational Risk
Weighting of Risk Categories
Glotz highlights the significance of weightings in assessing a bank's overall risk. While each risk category has its unique importance, weightings help determine the relative significance of one category in relation to others. For instance, credit risk typically holds a higher weighting due to its historical impact on earnings and capital. Weightings are dynamic and should be reviewed regularly, providing an objective lens through which to view a bank's risk profile.
Strategic Risk
The conversation places strategic risk under the spotlight, which Glotz explains why this is his favorite category of risk and the inspiration behind naming the company Strategic Risk Associates. Glotz underscores the importance of this category, which assesses external factors impacting a bank's ability to achieve its strategic goals. These factors can range from economic conditions and competition to management quality and the effectiveness of risk management programs. Effective risk management and a well-defined strategic plan play pivotal roles in managing strategic risk.
Reputational Risk
Often overlooked but equally vital is reputational risk. This type of risk stems from internal failures and how they are perceived in the market. For example, a cybersecurity breach may result in reputational risk when depositors lose trust in the bank and decide to move their deposits elsewhere. A bank's reputation and brand image are directly tied to this risk category.
Regular Evaluation of Risk
Glotz advises that weightings for risk categories should be subject to regular reviews, ideally on an annual basis. Major events, structural changes within the bank, and shifts in the economic environment can all prompt a reevaluation of these weightings.
This episode is a treasure trove of insights into risk management in the banking industry and how each of the eight risk categories profoundly influence a bank's overall risk landscape. To gain a deeper understanding of each of these categories, stay tuned for our upcoming podcast episodes where we will explore them in detail.
Don't miss the opportunity to stay informed and well-prepared in the dynamic world of banking. For more thought-provoking discussions on banking, finance, and risk management, subscribe to the "Risk Intel" podcast.
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