Aligning risk and strategy can help financial institutions more effectively manage their strategic imperatives, especially in today's uncertain world. Often those two metrics are tracked separately in the siloed goals of the chief risk officer and the chief strategy officer.
But if strategic imperatives are not mapped to underlying impeding risk factors, it's like taking the time to mix the ingredients for a cake but forgetting to turn on the oven. You will not get the intended results.
As 2022 gets underway and further uncertainty looms, here are four things to keep in mind when mapping strategy to risk.
1. Good Data Is a Must
If you can't trust your data or know how to map the data from across the organization into one central location, you are dead in the water. Good data is accurate, timely, distributed, secure and transparent, which enables financial institutions to be effective. Effective data should also be actionable, interactive, insightful and even prescriptive.
The biggest enabler to making good data effective and efficient is the integration from a system of record to analytic modeling. But for data to become prescriptive and help make real-time business decisions, leaders must have faith in their data.
With insight into their data, executives can make swift and informed policy decisions to help secure the future prosperity of your organization.
2. Understand How Strategy Aligns From the Top to the Bottom
When designing a strategy, there are two ways to view your organization: top-down and bottom-up. The top-down view is more about setting strategy, and it's important to assess the reward expected for its successful execution.
From a bottom-up standpoint, the strategy execution needs to be carefully monitored, whether you're using a risk metric, quantitative metrics or a qualitative assessment to plan and monitor emerging factors that could affect outcomes. A feedback loop encourages iterative improvements to strategy identification and adoption.
3. Risk Appetite Needs Executive-Level Commitment
One of the more important tools financial institutions have is their risk appetite. That will help them achieve a cohesive relationship between the top and the bottom of the organization and link risk and strategy. Risk appetite statements help institutions create tolerance bands around the underlying factors of the top-down strategy. And early warnings can be generated for factors that might breach those bands.
So, in a sense, your risk appetite statements help protect your strategic objectives. And, with the help of performance indicators and risk indicators, they also monitor the performance against the adaptive strategy.
Financial institutions are in the business of trading risk, so all strategies should be risk-aware and measured from a risk-adjusted basis. Especially with what we have experienced during the pandemic, it is important for an institution's strategy and risk appetites to have a true cycle, which includes baseline and stressed views. Risk appetite can help institutions link strategy and risk, so it's vital to work with a solution provider or tool that gives measured performance against your stated risk appetite and guidelines.
4. Breaking Down Silos
A best practice when going through your strategic planning process is to identify what performance targets are in the overall plan and the individual plans of your CEO and CFO, including what requirements are assigned to each. In many financial institutions, chief risk officers identify their own key risk indicators. Successful institutions give that position a seat at the table and tie risk into the strategic plan. Each strategic imperative that tracks performance should identify or highlight the key risk indicators.
When considering risk, ask what alternatives to the strategy exist for your organization in the event there's a downside scenario, and measure the two together monthly. By including performance and risk indicators for monitoring executive results, the financial institution gets a risk-adjusted view of how the C-suite is meeting their targets.
Our economic environment is likely to remain volatile as we continue to navigate the effects of the pandemic. The most agile financial institutions are more likely to remain competitive. With insight into their data, executives can make swift and informed policy decisions to help secure the future prosperity of your organization. Access to good quality data and employing the right strategies within your desired risk appetite will help your organization succeed.
In partnership with Strategic Risk Associates (SRA), Fiserv offers Watchtower, a powerful yet intuitive integrated risk and performance management platform that removes friction, cost and complexity for financial institutions. Watchtower delivers real-time insights for executives and the board while providing tactical guidance across the organization.