Buckle Your Seatbelt: Innovation Gives Risk Management a Wild Ride

Michael Mumm, Director of Enterprise Risk Management, Société Générale and Fabrice Fiol, Managing Director of Enterprise Risk Management, Société Générale
Michael Mumm, Director of Enterprise Risk Management, Société Générale

Michael Mumm, Director of Enterprise Risk Management, Société Générale

One word to describe the current state of risk management is turbulent.  With the rise of artificial intelligence (AI), global connectivity and new emerging risks, organizations are facing a bumpy future with respect to risk identification, assessment and measurement.  However, given the accelerated rate of new technologies and innovations in the financial services industry, one could certainly argue that the future is already here.  While this creates a tremendous amount of uncertainty and challenge, it also creates unprecedented opportunities.

Determining how a company values innovation—and more specifically the curiosity that drives innovation—is one way in which to assess an organization’s readiness to embrace new avenues. The genesis of most discoveries and inventions throughout history is curiosity.  Curiosity is critical to an organization’s performance, as it fosters an ability to adapt to uncertain conditions and external pressures.  Unfortunately, many leaders believe they have a corporate culture in which curiosity is valued, but in reality, employees face roadblocks when asking probing questions in the workplace.

To adapt to and benefit from innovation, organizations and their risk managers must not only create a culture that is nimble, agile and resilient, they must also cultivate an internal capability to deal with continuous change.  AI is transforming parts of the financial services industry and has given rise to a growing fintech sector that is creating new competitive pressures for traditional banks and more broadly the corporate sector.  Fintech startups have made a tremendous impact on the areas of credit scoring, fraud detection and customer service.  Successful risk departments must establish a culture that is open to adopting new methodologies and facilitates an environment where innovation can flourish by combining computing power and human interaction.

Management may worry that fostering curiosity leads to a costly mess of unfocused projects; however, promoting an inquisitive culture is important to help companies react and adapt to changing market conditions. Companies need to adopt a mantra of try, fail fast and try again.  Successful departments will not be afraid of failures; they will not only accept them along the way, they will also seek opportunities to be productively wrong by learning from mistakes. Instead of focusing solely on big ideas, we should make incremental gains by leveraging existing methodologies and experimenting with new concepts to create a more efficient and robust process for identifying, assessing and measuring risk.Fabrice Fiol, Managing Director of Enterprise Risk Management, Société Générale

Historically, Risk Management departments have leveraged standard models and assumptions to reasonably predict financial outcomes and isolate unforeseen events. The Enterprise Risk Management (ERM) has traditionally been tasked with monitoring all types of risks and with defining the enterprise governance and firm risk appetite in close coordination with their CRO. With the dawn of AI and big data, the Enterprise Risk Management function is now faced with increasing disruptions and new threats. We could point to cyber-risk remaining on top of Chief Risk Officers agendas, as well as the emergence of crypto-currencies and the development of blockchain technology.  To adapt to and benefit from innovation, organizations and their risk managers must not only create a culture that is nimble, agile and resilient, they must also cultivate an internal capability to deal with continuous change.

AI is transforming parts of the financial services industry and has given rise to a growing fintech sector that is creating new competitive pressures for traditional banks and more broadly the corporate sector.  Fintech startups have made a tremendous impact on the areas of credit scoring, fraud detection and customer service.  Successful risk departments must establish a culture that is open to adopting new methodologies and facilitates an environment where innovation can flourish by combining computing power and human interaction. While there has been a leap in the last few years in machine learning, we also want to emphasize that firms should re-think how they collect, store and transform their data: AI Algorithms won’t solve all data quality issues and instead are highly dependent on these important steps. This is especially true for any data related to firm risk appetite and the analytics deployed to assess the financial, operational and legal risks. Innovation and automation can also lead to more cost-effective solutions, allowing risk managers to better monitor the bank risk profile.

 Curiosity is critical to an organization’s performance, as it fosters an ability to adapt to uncertain conditions and external pressures 

From a practical standpoint, there are two ways that ERM departments can drive a change in culture are to emphasize learning and to break down barriers that prevent employees from exploring and broadening their interests.  While the financial services industry remains a results-based environment, focusing on learning in addition to performance can be more beneficial to both employees and to the overall organization.  Developing a culture that rewards employees based on learning and performance is one way to foster a truly creative mindset and incentivize these behaviors with long-lasting impact. There are many avenues to achieve this: sponsoring internal start-ups, creating innovation forums, developing innovation challenges where new concepts get pitched to the C-Suite, and finally partnering with technology firms and universities.

As technology and innovation continue to impact risk frameworks, successful organizations need to examine their risk managers’ skills and penchant for change, as well as how the firm values and encourages curiosity. In the meantime, continue to expect turbulence and disruption, so buckle up!

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