The Business Opportunity of Improving Risk Management How Freddie Mac will lead the Market Through a Holistic Approach to Risk Management
It’s a thrilling time to be a risk management leader in financial services, as access to Big Data and advances in technology unleash opportunities to strategically improve business models. The “Internet of Things” is transforming businesses, products, delivery mechanisms and, more importantly, increasing client expectations. For companies that adopt, advances inartificial intelligence and machine learning hold the promise of reinventing both the customer and employee experience, while protecting them from new and evolving vulnerabilities and threats.
Risk management leaders work with corporate executives to navigate a dynamic environment where opportunities are developing and changing every day. And those leaders face one of the key challenges of our time: creating a risk organization, establishing processes and governance that are not only effective in managing risk but also highly efficient in terms of responsiveness to the fast-changing technology and regulatory landscape.
Of course, emerging technology, digital processes, new business models and the pace of change creates risks and threats that we and other financial services firms must manage effectively. However, inefficiency increases financial or operational risk, particularly if the organizations do not adjust, respond to or prioritize in a dynamic manner. Understanding our risks and adapting helps us navigate this complex landscape—and assist us in making wise business decisions. This effectiveness and efficiency imperative affect every aspect of our organization at Freddie Mac.
The “Internet of Things” is transforming businesses, products, delivery mechanisms and, more importantly, increasing client expectations
Strategic Risk Management
Freddie Mac is adopting a strategic approach to risk management. This is a major effort taking place not just at our company – but within many major financial institutions. For Freddie Mac, some of the practices include the following:
I. Sharing Cross-Functional Insights.
We have recruited experts and specialists across the spectrum of risks, from information, technology, financial, and compliance risk. We are fostering an environment where employees can work more collaboratively, attacking a challenge from all angles and solving it once, rather than working in parallel.
For example, we are improving our ability to manage information security and privacy risk through closer collaboration and a better understanding of the risks embedded in our businesses and IT. As we have seen in the market, it is imperative for trusted brands to lead on privacy and move swiftly to address any gaps or issues that arise. This increased collaboration has improved our ability to do so.
II. Reorganizing to Work More Productively
Like other financial institutions, Freddie Mac has adopted a unified risk approach to managing operational risks. That’s a recognition that, as our business and regulatory commitments grow, managing risk in a more holistic manner becomes ever-more important. For example, we have developed an integrated framework with a common language and measurement to manage risk. Doing so will continue to allow us to streamline processes, thereby reducing inefficiency and increasing productivity.
III. Improving Risk Measurement
All large financial services firms now have an enterprise risk framework that they’ve developed and refined with industry standards and best practices. However, many firms still struggle with measuring risk and finding a common currency to aggregate risk “top of the house.”
At Freddie Mac, we have made advances in measuring financial risks. In the area of operational risk, we are working through a number of options, including the following:
• Identification and measurement across the full spectrum of operational risks;
• Defining risk appetite across all areas of operational risk, including model, information, technology, and business resiliency risks; and
• Whether key risk indicators effectively capture those risks, so that we can measure whether these risks are increasing or decreasing.
IV. Capturing More Opportunity
Finally, when you have good visibility into accurate data, and a strong, healthy risk management organization, it can have the added benefit of capturing more business opportunity.
For example, Freddie Mac is leveraging the expertise of our workforce and enhancing the skills of our employees to enable them to better understand and capture opportunities that enhance the experience for our customers, including reducing borrowing costs for potential homebuyers. In addition, we use data to improve risk segmentation and analytics, which helps the company support its mission of bringing liquidity, stability and affordability to the single-family and multifamily housing markets.
With the exponential growth of big data, artificial intelligence and cloud computing, the technological landscape at many companies is rapidly changing for the better. As one of the largest housing finance companies in the United States, Freddie Mac manages massive amounts of data including customer and collateral information and information sourced from external sources that allows us to make better decisions. We are using that data within our models developed using a variety of modeling methods emanating from multiple disciplines to improve borrower experience and credit performance.
Yes, it’s an exciting time to be a market leader in financial services. One of the important ways we help maintain and grow that leadership is by creating a risk management organization that effectively manages risk and responds to the dynamic and changing environment quickly and efficiently.
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