Managing credit risk can be a trial of the business and organization, even in the best of circumstances. In addition to that, it becomes specifically problematic when complex technology and sensitive data are involved. By implementing sound risk management strategies, time, money and other resources to can be saved, eventually, it will also prevent serious risks from threatening the health of portfolio.
There are a number of key strategies that can be put in place to protect the organization and help the organization better understand and manage the risks to mitigate threats and take advantage of opportunities:
- Identify your risks. Risks can be identified using various methods, such as interviews, surveys, and facilitated workshops, and should include emerging risks and events that might bring negative consequences to your organization.
- Perform a risk assessment. Enterprise risk assessments can prioritize risks across your company, while also identifying top risks, highlighting appropriate responses to risks and where control adequacy is too low, and driving risk-based monitoring processes.
- Develop a risk culture. The risk culture should support risk management, with a tone at the top that references the importance of risk management, incorporates risk management into executive communications and exhibits desired risk management behaviors.
- Develop a strategy to respond to risk. Actions should seek to reduce risk likelihood or impact and consider risk tolerance, with common responses including avoid (get out), accept or retain (monitor), reduce (institute controls) and transfer or share (partner with someone).
- Determine the risk appetite. Developing a defined risk appetite not only helps employees understand the risks the company is willing to take but also helps management and the board align views on risk before an incident occurs.
- Monitor risks. Risk monitoring should follow risk assessments, with higher risks monitored more frequently and thoroughly, and forward-looking key risk indicators (KRIs) providing early risk identification, and as a result, fewer surprises.
- Leverage enterprise risk management (ERM). Instead of tactical, compliance-focused processes that are silo-based, evaluate risks individually that are supported by rules. ERM is strategic and performance-focused, implementing a consistent risk approach across your organization.
- Integrate ERM into decision-making. Risk management must be integrated into day-to-day business activities and decisions, with risk managers involved at the onset of strategy-setting processes and risk information shared across the company.
- Report risks. Risk reporting should also follow risk assessments, with higher risks reported more comprehensively and emphasis placed on highlighting key risks and recommendations for, and status of, management action.
There is no risk management approach that is ideal for every company, but several best practices can be leveraged and customized for your organization. In a competitive business environment, all organizations must implement processes to manage risk effectively to achieve business and strategic objectives. In business, many risks ahead. Contemplate additional pressures such as protection of market value, expectations of counterparties and associated risks, and management’s need to demonstrate reasonable awareness and management rapidly emerging risks into extra risks that need to be managed. Even if resources may be tight, the organization can experience significant benefits from dedicating more effort to risk management.