Reputation Risk: The Risk of Risks Back in the day, many banks gave “Reputation” its own line in their risk taxonomies. But it showed up of course everywhere. Like the over-eager student begging to answer every question. Then, in early 2025, U.S. and U.K. regulators scrubbed it from standalone exam categories and tucked it into...
RETHINKING RISK: FROM DEFENSE TO COMPETITIVE EDGE There was a time when “Risk” had clear definitions to include Interest Rates, Market Volatility, Credit Defaults, Operational Hiccups etc.. Patterns of risk, while never simple, followed familiar curves. Compliance, in turn, responded with frameworks built for steady navigation that were codified, siloed, well-documented. THAT TIME IS OVER....
In today’s world, disruptions are inevitable— whether from cyberattacks, system failures, natural disasters, pandemics, or geopolitical upheavals. Financial institutions (self-respecting firms of any genre actually), embedded as they are in the global economy, must not just react to these shocks but ensure they can continue delivering critical services seamlessly, whatever the challenge may be. This is where Operational Resilience takes center stage. It’s no longer about just preventing failures—it’s about withstanding, adapting, and recovering from them while minimizing impact on all stakeholders, customers, markets, and economies.
The root of most risk management failures lies in human behavior. Greed, fear, and ego often lead to poor decision-making and unethical behavior, particularly during times of stress or opportunity. Effective risk management requires not only robust systems and processes but also a strong focus on people, culture, and ethics.
The Basel Committee proposes a new capital framework for operational risk based on a business indicator and internal loss data, aiming for simplicity and risk sensitivity. However, regulators retain control through multipliers and stress tests.
The author criticizes the over-reliance on GRC technologies and the proliferation of new risk categories like Regulatory, Compliance, and Legal Risk. They argue that these categories are often redundant and that the true focus should be on underlying human behavior and systemic issues that lead to risk.
The global regulatory landscape has intensified scrutiny on anti-money laundering (AML) and Know Your Customer (KYC) practices. While these efforts aim to combat financial crime, they have created significant burdens for financial institutions. These institutions often struggle with complex regulations, data quality issues, and resource constraints, leading to challenges in effectively implementing and maintaining robust AML/KYC programs.
The author argues that leverage is a key driver of systemic risk and that the current rise in household debt, particularly credit card debt, could be a warning sign of potential future financial instability. The author suggests using a simple leverage-based risk indicator to monitor systemic risk and advocates for increased vigilance in the face of growing debt levels and economic uncertainty.
The financial crisis of 2008 exposed the inadequacy of risk management practices in the financial industry. Banks engaged in risky activities like subprime lending and complex derivatives without properly considering systemic risks. New regulations like Basel III and Solvency II aim to improve risk management by requiring better data aggregation, capital adequacy, and stress testing.
RCSA is a critical risk management tool, but its effectiveness is often hindered by poor execution. Issues such as unclear scope, excessive bureaucracy, and a focus on form over substance can lead to unproductive and misleading results. To improve RCSA, organizations should prioritize clarity, efficiency, and a focus on identifying and addressing real risks.
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