Non-Financial Risk Management: Emerging stronger after Covid-19
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Financial institutions and non-financial risk: Learning from the corporate approach
Thomas Poppensieker, Sebastian Schneider and Michael Thun
Foreword
Preface
Introduction
Introduction to Part I: The origins of non-financial risk management
The complete history of operational risk regulation (abridged)
Financial institutions and non-financial risk: Learning from the corporate approach
The painful financial side of NFR
“Risk management is about managing risk” and “It’s all about people”: Psychology might be more important than models
The confusion of Babel: What’s in the name NFR – taxonomy
Introduction to Part II: Governance of non-financial risk management
“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
Do you know who is who? Three lines of defence in the context of NFR
Herding cats? NFR divisions as truly diverse units
“Just do it!”: Partially self-organising governance structures for NFR frameworks
Introduction to Part III: Tools and instruments for non-financial risk management
A risk by any other name: Identification, classification and agendas
Old but gold? Mastering the RCSA despite Covid-19
Biases in scenario analyses and how to mitigate them
When scenarios are not severe enough: Stress testing for non-financial risk
Ending NFR in NFR: From Excel sheets to professional IT systems for NFR management
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
It won’t be over after Covid-19: Pandemics and operational resilience
Dealing with IT complexity and innovation: Delivering business resilience and customer outcomes
Protecting the new gold: Information security
Conduct risk and the impact of Covid-19
From lawsuits to models: Compliance risk and financial crime
Others are doing it cheaper: But can they really? Opportunities and risks in outsourcing
Managing reputation and stakeholders
Introduction to Part V: The future of non-financial risk management
ESG risk as a new (and very important) trigger for NFR
Looking into the crystal ball: What will NFR management look like in 2030?
This time will be different: An alternative future of NFR management
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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