How to quantify risks in financial services

No business is risk-proof, and financial services are no exception. While you cannot make your business completely risk-proof, you can take measures to mitigate the risk and safeguard your business. Risk assessment and analysis are the first steps in understanding your risks and their impact on your business. Once you know this, you can take appropriate measures to mitigate the risks.

No business is risk-proof, and financial services are no exception. While you cannot make your business completely risk-proof, you can take measures to mitigate the risk and safeguard your business. Risk assessment and analysis are the first steps in understanding your risks and their impact on your business. Once you know this, you can take appropriate measures to mitigate the risks. 

What are the major risks for financial services?

Financial services are subjected to various risks. These are operational, credit, market, and liquidity risks. Financial services must analyze and assess their risks to save them from failure, which may impact thousands of people. Understanding the risks can also help you stay prudent in regulating them more proactively. Let’s understand each of these. 

Operation risks: Any risks associated with a financial service’s operations are operational risks. It can be cyber threats breaching a bank’s data where hackers steal the customers’ information. It can severely damage the reputation of the bank and break trust. Operational risk may also occur due to human, system, or process errors. The impact of the risk can vary depending on the nature of the financial service. For example, retail banking might have a low impact from human or system erros, while it can severely impact a trading service. 

Credit risks: it is one of the biggest risks for financial institutions. It happens when the borrower fails to repay the amount per the agreement. While it is difficult to avoid a credit risk completely, financial services can take certain measures to lower the impact in several ways. 

Market risks:  can occur due to a bank’s activity in the capital markets. As the equity market remains volatile, financial services that are involved in investing in capital markets stay more prone to market risks. The commodity price can also play a major role for banks that have invested in companies that manufacture the commodities. Changes in the commodity price can affect the value of the investment. 

Liquidity risks: a bank’s ability to access cash to meet funding obligations are referred to as liquidity risk. Common reasons for banks facing liquidity risk are over-reliance on short tern fund sources, mismanagement of liabilities, etc. 

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What is risk assessment?

Risk assessment is a process that helps you identify risks that can impact your business. It further helps you assess the intensity of the risks so that you can bring in the necessary processes and controls to reduce the impact of the risk. You can use a risk assessment framework to assess your risks. There are various risk assessment frameworks. Some of the well-known ones include:

• NIST Risk Management Framework
• Operationally Critical Threat, Asset, and Vulnerability Evaluation (OCTAVE)
• Committee of Sponsoring Organizations of the Treadway Commission (COSO) Risk Management Framework
• ISO 31000 (series)
• Control Objectives for Information and Related Technology (COBIT)
• Threat Agent Risk Assessment (TARA)
• Factor Analysis of Information Risk (FAIR)

What is the purpose of a risk management framework?

A risk management framework helps you identify risks, prioritize them, measure the impact of the risks, create a plan to mitigate the risk, document the response, and review it from time to time. 

Some of the objectives of a risk management framework are:

• Developing a risk profile and doing a quantitive risk assessment
• Find out ways to mitigate risks and justify the associated costs
• Develop an inventory of assets
• Identifying and documenting risks
• Understanding the ROI for the risk mitigation process

How to effectively do a risk assessment

While each company manages its risk assessment process, here are five common steps to follow irrespective of the nature of your organization. 

• Identify the risk: The first step is to identify any potential risks that can negatively impact your business if they happen. A potential risk can be a natural disaster, a pandemic, cyberattacks, system shutdown, power failure, or utility outages. 
• Who will be affected: Once you identify the risks, map each risk that will be affected the most. You can do a risk analysis to understand the intensity of the risk and how it will impact the concerned stakeholders. Risk can cause damage to the company’s reputation, critical infrastructure, employee safety, customer data, or business operations. 
• Evaluate risk: In the next step, you need to evaluate the risk and create control measures to lessen the damage intensity or mitigate the risk. Some of the potential damage a risk can cause are financial loss, lawsuits, penalties, property damage, and business interruptions. 
• Record your findings: The next step in the process will be to record your findings. Document them and keep them accessible to all. Ensure your record captures the risks, the intensity of each of the risks, the potential damage it can cause, who will be affected by the risks, and a plan o how you can minimize the impact. 
• Review and update the risk profile: In a modern dynamic business environment, potential risks and their impact can change significantly. So, ensure to go back and review your risk document and update it from time to time.

Using a risk assessment matrix

 A risk assessment matrix is represented by a grid where the x-axis is represented as the likelihood of having the risk while the Y-axis denotes the impact of the risk. Each axis progress from low to high. Each event is plotted based on its likelihood of occurrence and the impact it might create. 

Quantitative Vs. Qualitative

Risk assessments can be either quantitative or qualitative. A quantitative assessment has some values attached to the probability of the risk occurrence and the impact it can create. So a quantitative risk can help you calculate the risk factor, which can have a tangible impact on the revenue. 

Qualitative risk assessment doesn’t have any numerical values attached to the probability of the occurrence nor the amount of loss prediction. It simply qualifies as a risk as more harmful or less harmful. 

How VComply can help 

VComply is an integrated GRC platform that helps you establish governance in the organization, identify risks, and help you to stay compliant with industry guidelines and regulations. Book a live demo to understand what VComply can do for you.