The financial services consultancy has recently seen drastic change, both on the demand and the supply side. Financial institutions, regulators and other industry participants are looking for fresh approaches to the engagement and delivery of consulting services, while being conscious of value proposition and the effective use of budgets. In short, clients are looking for much more than an RFP and a TOR. This has generated opportunities.
Besides customer deposits, a financial institution’s capital is its most important asset. It ensures the institution can survive extreme events commensurate with the institution’s risk appetite.
Liquidity management allows the bank to ensure it has sufficient assets that can be converted to liquid assets to meet its short-term obligations while balancing liquidity and returns. The Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP) are important tools for both the institution and its regulators.
Strategy, capital, liquidity and risk appetite are interlinked and play an important role in the stability of the institution as well as the financial system as a whole.
Credit risk is one of the biggest risks for retail and commercial banks and relates to the risk that a client will not repay the money they have borrowed on time.
When a customer does not repay their principal and interest, it puts the ability of the financial institution to repay the money they have borrowed at risk.
In turn, this will have a domino effect on other financial institutions. Credit risk is managed by carefully considering the chances of a client not repaying their loan prior to extending it and managing the relationship throughout.
Appropriate limit setting and management, escalation processes and exception reporting are as important as know-your-customer processes.
Financial crime is mainly associated with activities related to dishonest wealth generation by means of insider trading and market abuse. When a customer does not repay their principal and interest, it puts the ability of the financial institution to repay the money they have borrowed at risk.
In addition, the financial system is open to be exploited by individuals for the purpose of money laundering or terrorist financing. To manage this risk, a stable governance process must be in place with robust policies and procedures including know-your-customer, know-your-employee, enhanced due diligence, trend analysis, sanctions and early warning systems.
Originally used to refer to the use of technology in bank systems, financial technology or fintech is now more commonly used to refer to the use of technology to provide innovative, customer-oriented solutions. Fintech enables retail, corporate and wholesale clients to manage their financial operations via a range of innovative solutions on a range of platforms.
The use of fintech allows banks to reach customers in different ways and to provide services even in the most remote locations.
Fintech applies to traditional banks, and also to newcomers in the market aiming to boost competition by disruption. The latter covers, for example, challenger banks, cryptocurrency and robo-advice. Fintech offers significant opportunities but also comes with its own set of governance and risk-related challenges.
The financial market is dynamic with continuously changing prices of assets depending on supply and demand as well as economic circumstances.
Market risk, the risk of adverse price movements in financial assets, can cause significant losses and needs to be managed carefully.
There are a variety of measures that can be considered including value at risk, portfolio simulation and credit value adjustments.
Market risk cannot be avoided completely, but it can be managed by careful monitoring and portfolio diversification.
The uncertainties and risks associated with the day-to-day operations of any institution are varied and range from high occurrence, low-impact issues to low occurrence, high-impact issues. Operational risk occurs as a result of a breakdown of internal processes, procedures, systems or people.
External events such as political or economic changes do not fall under operational risk. Willingly or inadvertently being involved in fraudulent activity, systems failure and incorrect transaction processing are among the operational risk issues faced by financial institutions.
Managing operational risk includes assessing the correct level of exception reporting and ensuring the focus remains on low occurrence issues with a significantly high potential loss.
The role of financial institutions is crucial for the economy due to their intermediary role between the depositors and users of funds. Financial institutions mobilize funds from savers and depositors and deploy them in activities that support enterprises and help drive economic growth.
The stability of the financial system is of the utmost importance and is achieved via a combination of measures including corporate governance, codes of conduct and regulations.
The regulatory landscape is continuously responding to new threats to financial stability and the penalties for non-compliance can be significant.
Financial institutions must ensure they are aware of current regulations, how they impact them, ensure they are compliant or can justify why not, and continuously review their internal processes to assess and address any weaknesses.
Shariah risk specifically occurs in Islamic financial institutions when a transaction has been executed and contravenes Shariah or the transaction structures approved by the Shariah board of the institution.
When a transaction is not Shariah compliant, the financial institution can be considered negligent and therefore be liable for all losses.
In addition to financial loss, there is also the loss of reputation to consider. Shariah risk may also occur if changes in permissibility are not carefully managed against transactions with a long maturity.