Boards at financial services institutions play a critical role in providing strategic guidance, ensuring oversight, and maintaining accountability. In addition to setting the organization’s vision and fulfilling fiduciary duties, board members must understand how to conduct strategic risk assessments and build enterprise risk management frameworks when necessary.
What is Financial Risk Management?
Boards should regularly assess a range of financial risks—including market, credit, liquidity, technology, and operational risks. They must evaluate the likelihood of these risks and their potential impact on the institution’s financial health and strategic goals. This analysis provides essential insights that boards must communicate clearly to stakeholders.
Building an effective financial risk management strategy is a continuous process that supports strategic decision-making and protects an organization from unanticipated financial risks. When activating a financial risk management strategy, the board plays a critical role in ensuring that the organization invests in robust systems and cultures to maximize output. The board’s oversight is key in maintaining a rigorous risk management posture.
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Financial Risk Management Fundamentals
Once risks are identified, measured, and assessed, you can design your enterprise risk management strategy. Here are the fundamental risk management steps that will minimize the impact of those risks.
1. Risk Identification
Zero in on the potential threats that can have a negative impact, such as financial losses, reputational damage, or operational disruptions. You can identify these threats by facilitating group discussions, examining historical data, gathering information from stakeholders, and developing hypothetical scenarios.
For example, understanding how different balance sheet items can affect the overall financial stability of an institution can help identify investment and credit risks.
2. Risk Measurement and Assessment
Once you’ve documented potential risks, analyze their root causes and possible consequences. Use a risk assessment matrix — a chart or spreadsheet that compares potential risks to their predicted impact — to determine how likely each risk is to result in unfavorable outcomes.
Support your analysis with cost-benefit or statistical methods to quantify risks in financial terms. You can also use key risk indicators (KRIs) and key performance indicators (KPIs) to measure and monitor risk effectively.
3. Risk Mitigation and Control
The next step is to decide how you’ll manage the identified risks. The board of directors has several choices when mitigating risk, including:
- Implementing safety standards or conducting audits.
- Transferring the risk to third parties, usually making use of insurance or contracts.
- Accepting the risk if mitigating it will cost too much or is determined to be a risk that can be tolerated.
Controls, such as preventive controls, detective controls, or corrective controls can be implemented. Security measures or training can prevent risks from occurring, while monitoring systems or auditing can detect risks as they happen.
4. Risk Monitoring and Reporting
Once you’ve implemented risk measurement and assessment tools, actively monitor them to evaluate whether identified risks were avoided or minimized. Regularly report the effectiveness of mitigation and control efforts to stakeholders to ensure transparency.
5. Risk Governance and Policy Framework
The board must ensure these risk management processes align with the institution’s strategic goals while meeting regulatory requirements. Clearly defining roles, responsibilities, and methods strengthens transparency, accountability, and informed decision-making.
Understanding the Board's Role in Financial Risk Management
Board members responsible for financial risk management must now develop a clear risk management plan and policy framework. Here’s what that framework should include.
1. Setting Risk Appetite and Strategy
This entails approving the organization’s risk appetite. It ensures risk management integrates with the goals or objectives of the business.
2. Oversight and Governance
The board must provide oversight and governance, including:
- Ensuring an appropriate risk management framework is in place
- Reviewing and approving risk policies, procedures, and major risk decisions
- Delegating authority to risk or audit committees, where appropriate
3. Monitoring and Assurance
Risk management members of the board must regularly review risk reports and stress test outcomes to make sure that significant risks are communicated and addressed.
4. Creating a Risk-Aware Culture
Another important step is promoting a risk-aware culture throughout the workplace so employees at all levels can assist in identifying, assessing, and mitigating risks. This also ensures ethical conduct and responsible risk-taking throughout the organization.
5. Regulatory Compliance
This may be the most critical step in implementing risk management strategies: ensuring compliance with laws, regulations, and industry standards while maintaining transparency in risk disclosures. Doing so builds trust, promotes stability, and helps the organization reach its goals more efficiently.
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Risk management is important for safeguarding assets, maintaining stability, and ensuring organizational success.
While this covers the fundamentals of financial risk management, additional training can help strengthen your strategy. Board members looking to deepen their knowledge can explore enterprise risk management certification programs, such as those offered by the American Association for Investment and Financial Management.
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About The Author
- Adam Wire is a Content Marketing Manager at OnBoard who joined the company in 2021. A Ball State University graduate, Adam worked in various content marketing roles at Angi, USA Football, and Adult & Child Health following a 12-year career in newspapers. His favorite part of the job is problem-solving and helping teammates achieve their goals. He lives in Indianapolis with his wife and two dogs. He’s an avid sports fan and foodie who also enjoys lawn and yard work and running.
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