Financial institutions and non-financial risk: Learning from the corporate approach

Thomas Poppensieker, Sebastian Schneider and Michael Thun

Contents

Foreword

Preface

Introduction

Introduction to Part I: The origins of non-financial risk management

1.

The complete history of operational risk regulation (abridged)

2.

Financial institutions and non-financial risk: Learning from the corporate approach

3.

The painful financial side of NFR

4.

“Risk management is about managing risk” and “It’s all about people”: Psychology might be more important than models

5.

The confusion of Babel: What’s in the name NFR – taxonomy

Introduction to Part II: Governance of non-financial risk management

6.

“It’s the culture, stupid”: Risk culture as the key building block of NFR management – and why some banks have come through the Covid-19 pandemic better than others

7.

Do you know who is who? Three lines of defence in the context of NFR

8.

Herding cats? NFR divisions as truly diverse units

9.

“Just do it!”: Partially self-organising governance structures for NFR frameworks

Introduction to Part III: Tools and instruments for non-financial risk management

10.

A risk by any other name: Identification, classification and agendas

11.

Old but gold? Mastering the RCSA despite Covid-19

12.

Biases in scenario analyses and how to mitigate them

13.

When scenarios are not severe enough: Stress testing for non-financial risk

14.

Ending NFR in NFR: From Excel sheets to professional IT systems for NFR management

15.

Breaking up with risk management: Using the power of controls for good not the prevention of evil

Introduction to Part IV: Focus areas of non-financial risk management

16.

It won’t be over after Covid-19: Pandemics and operational resilience

17.

Dealing with IT complexity and innovation: Delivering business resilience and customer outcomes

18.

Protecting the new gold: Information security

19.

Conduct risk and the impact of Covid-19

20.

From lawsuits to models: Compliance risk and financial crime

21.

Others are doing it cheaper: But can they really? Opportunities and risks in outsourcing

22.

Managing reputation and stakeholders

Introduction to Part V: The future of non-financial risk management

23.

ESG risk as a new (and very important) trigger for NFR

24.

Looking into the crystal ball: What will NFR management look like in 2030?

25.

This time will be different: An alternative future of NFR management

26.

Right time, right place: The drive for change in operational and non-financial risk

Since the mid-1990s, financial institutions, and especially banks, have taken the lead in developing advanced approaches to managing financial risks: credit risk, market risk, and funding and liquidity risk. These practices moved in tandem with efforts to create more systematic regulation, beginning with the original Basel I accord in 1988. Basel II and Basel III followed in the 2000s, and amendments known as “Basel IV” are slated for implementation in 2023. In addition, annual stress-testing exercises are now required by various regulators. At the core of these approaches lies the fundamental understanding that risks can be quantified and expressed in terms of an equity/capital buffer that banks need to hold to compensate for potential losses.

Financial risks are reflected in the financial positions on banks’ balance sheets, and result from their risk-taking activity. Non-financial risks arise from the bank’s operations (processes and systems), and are similar to risks faced by companies outside the financial sector (“corporates”). Over time, corporates have developed approaches to address non-financial risk while adapting approaches developed by banks to manage financial risk

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