Challenges in Risk Management (FRM)

The process of identifying, assessing, responding, and monitoring the threats to an organization’s industry position is commonly referred to as risk management. The process is often ultimately the roadway to drawing an estimate of total earning predictions for organizations. The risks to companies can stem from a range of various sources, such as technology, natural disasters, internal systems, legal liabilities, company branding, compliance needs, etc. The insights into these potential threats is crucial in helping businesses make informed decisions about future investment decisions along with the preparation for long-term decision-making. It also allows for the better positioning of a company and for strategic planning that avoids unexpected last-minute costs.

What Are the Biggest Challenges in Risk Management Today?

Currently, the top challenges in risk management are ESG risks that include climate, social, and regulatory issues, ongoing concerns about the global supply chain, and the ever-present fraud, tech, and systems risks. Here are the top challenges to look for:

1. ESG Risks

ESG risks are the environmental, social, and governance-related risks that may influence a company. There are a lot of elements that fall into ESG, including climate change impacts and mitigation, environmental management practices, employee working and safety conditions, a company’s anti-bribery and corruption practices, and an organization’s overall compliance regarding industry-specific laws and regulations. When evaluating risk in this space, it’s useful to recall that every problem may also hold an element of opportunity. For example, the IMF reported last year that sustainability initiatives are a growth area in Asia. In addition, Fast Company shared that in 2021 ESG investments hit an all-time record at an estimated $120 billion — more than double the 2020 $50 billion commitments.

2. Supply Chain Issues

COVID’s disruption to the global supply chain continues to impact a range of industries. Marketplace reported on why industries are still facing snarls. Risk assessors need to factor in what those supply issues mean for them. It’s a good idea to understand if high-priority assets for your business have outside dependencies, and to build back-up plans. Unfortunately, supply chain risks aren’t going away any time soon.

3. Fraud Concerns

Those supply chain gaps have created holes that fraudulent companies are quick to fill. There has been deceit regarding PPE gear since COVID first emerged, and it continues into 2022. The New York Times recently reported on how consumers can find quality KN95 masks due to the prevalence of counterfeits. Due to an early outpouring of government assistance during the COVID outbreak in the United States, there was an increase in loans and loan forgiveness. Some scams pose as government agencies offering aid, and the FTC has a list of warning signs to look out for if your business has been approached with unsolicited outreach. It’s recommended that companies conduct fraud risk assessments, and review for both external and internal fraud.

4. Cyber Risk

Cyber risk is always top of mind when prioritizing issues amongst the many challenges facing risk management. The pandemic has exacerbated issues, with a mostly-remote workforce for many companies. This has elevated risk due to less device control and increased points of potential exploitation resulting from at-home assets being used by employees. As Forbes reports, work-from-home employees are at a greater risk of hacking than those in offices. Home connections are less secure, and the increase of online tools for team collaboration and productivity often have minimal login security settings. The prominence of remote teams has also slowed the roll-out of new technologies, which could expose companies to more security gaps.

5. Inadequate Processes

Risk assessments need to go beyond a standard checklist. It’s important to review the basics, but risk management must also suss out gaps and uncover information that teams are missing — working to determine what they don’t yet know. Make sure that your risk assessment process takes into account steps to investigate and probe for the potential concerns you aren’t even aware of yet, enabling you to uncover every issue.

*Information Source: AUDITBOARD


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The Future of Bank Risk Management with FRM

By 2025, risk functions in banks will likely need to be fundamentally different than they are today. As hard as it may be to believe, the next ten years in risk management may be subject to more transformation than the last decade. And unless banks start to act now and prepare for these longer-term changes, they may be overwhelmed by the new requirements and demands they will face.

So, what will the risk function look like in 2025? It is likely to have broader responsibilities, to be very engaged at a strategic level, and to have much stronger, collaborative relationships with other parts of the bank. At the same time, its talent pool will probably have experienced a massive shift in expertise toward better analytics and greater collaboration, and away from operating processes. Most of the latter can reasonably be expected to be automated, real-time, and paperless by then. IT and data will likely be much more sophisticated, often employing big data and complex algorithms. As a result, the risk function may be able to make better risk decisions at lower operating costs while creating superior customer experiences.

The six structural trends that will transform bank and financial risk management over the next ten years:

Trend 1: Continued expansion of the breadth and depth of regulation

The scope of regulation will continue to expand, propelled by four drivers. First, public and hence government tolerance for bank failures has shrunk since the global financial crisis, and the appetite for interventions using taxpayers’ money to save banks has evaporated.

Second, governments are policing illegal and unethical behaviour much more tightly. This has been driven by a general shift of attention toward financial crime, the vanishing tolerance for tax avoidance, and the perceived increased threat of terrorism from individuals and countries since September 11, 2001, attacks in the United States.

Third, governments are increasingly demanding both domestic and global compliance with their regulatory standards. They want “good banks,” not just “good banking practice within their borders.” As a result, laws, and regulations are increasingly applied with extraterritorial effects.
Lastly, we expect the regulation of banks’ behaviour toward their customers to tighten significantly, as the public increasingly expects improved customer treatment and more ethical conduct from banks.

Trend 2: Changing customer expectations

Over the next decade, shifts in customer expectations and technology are expected to cause massive alterations in banking and give it an entirely different profile. By then, widespread technology use is likely to be the norm for customers. The current tech-savvy younger generation will be the major revenue contributor to banks by 2025 because banks make most of their money with customers over 40. Simultaneously, older bank customers are expected to adopt technology at a much higher rate.

Customers will likely expect intuitive experiences, access to services at any time on any device, customized propositions, and instant decisions. To deliver on the customers’ expectations, banks will probably require redesigning the whole organization from a customer-experience perspective and digitizing at scale.

Trend 3: Technology and analytics as a risk muscle

Technology will not only change customer behaviour but also enable new risk-management techniques, often coupled with advanced analytics. The proliferation of new technologies provides cheaper, faster computing power and data storage, which enable better risk decision support and process integration.

Trend 4: Additional (non-financial) risk types are emerging

Although management of financial risks has advanced significantly over the last 20 years, this is not the case for other risk types, particularly nonfinancial ones. The tremendous increase in fines, damages, and legal costs related to operational and compliance risks over the past five years has forced banks to pay much more attention to these risks. This will probably increase even further, due to the regulatory trends discussed earlier and given the expected rise in capital requirements for operational risk.

Trend 5: Better risk decisions through the elimination of biases

Another risk is that of making wrong decisions due to unrecognized biases. Over the last 30 years, enormous strides have been made in understanding how real humans, not the Homo Economicus of traditional economic theory, make economic decisions. We have learned that even when people attempt to approach a problem rationally and diligently, their decisions are often suboptimal, due to various conscious and unconscious biases.

For example, some energy utilities that have to make multibillion-dollar investments that can make or break the company (e.g., building a nuclear-power plant) have completely redesigned their major investment-decision processes. These are very relevant for banks, which make thousands of risk decisions every day; every bias that affects each decision can lead to an incorrect underwriting decision or poor pricing. Not only that, but a cascade effect can set in, with multiple biased decisions having a cumulative effect on the bank’s overall risk levels.

Trend 6: Need for strong cost savings

The banking system has suffered from slow but constant margin decline in most geographies and product categories. Banks have worked very hard and used operational cost improvements to compensate for these declines, resulting in a constant return on equity at the lower end of the long-term average, which is in the upper single digits. While there will probably be substantial regional differences, the downward pressure on margins is expected to continue across all geographies.

As a result of these disruptions, banks will possibly need to rethink their operating costs so they can deliver more value at lower costs. Once banks have exploited traditional and incremental cost-cutting approaches such as zero-based budgeting, value-added analysis (i.e., demand management), and outsourcing, we believe that simplification, standardization, and digitization will likely be the only sizable avenues left for substantial cost savings.

This article is an excerpt from a McKinsey&Company report.

All You Need to Know About the FRM Certification

Where there is a finance enterprise, there is financial risk. Therefore, financial risk management is an essential aspect of running a successful financial firm. It is a skill set that’s in high demand, but what exactly is the financial risk management certification? What does it entail? What kind of careers does it offer? This article tells you everything you need to know, including what it is, the techniques used, what is required, and careers in the field.

What is Financial Risk Management?

Financial risk management is a finance practice that uses financial instruments and data analysis to manage exposure to operational, credit, market, foreign exchange, shape, volatility, liquidity, inflation, business, legal, reputational, sector, and other types of risk. The purpose of this practice is to identify the sources of risk, measure them, and develop plans to address them.

Most major retail, commercial, and investment banks have financial risk management practices or departments. However, as you can imagine, it is not limited to banking. You can find financial risk management at nearly every major asset management firm, hedge fund, consulting firm, and regulator in the world.

In the world of finance, financial risk management is usually applied to four types of risk:

Market Risk

This is the possibility of incurring large losses from adverse changes in financial asset prices, such as stock prices or interest rates.

Credit Risk

This is the risk that borrowers will not repay their debt obligations in full when they are due.

Funding (or liquidity) Risk

This is the risk that a firm cannot obtain the funds necessary to meet its financial obligations, such as short-term loan commitments.

Operational Risk

This is the risk of monetary loss resulting from inadequate or failed internal processes, people, and systems or from external events.

What Are the Requirements for Financial Risk Management?

Here are the requirements for financial risk management, including education, skills, and qualities:

College and Graduate Degrees

A career in this risk field requires a bachelor’s degree, but a graduate degree is preferred, especially an MBA or a doctorate in finance or economics. A Ph.D. in statistics or physics is a viable alternative. Many of those in the field also earn the FRM® designation, a certification offered by the Global Association of Risk Professionals (GARP).

Financial Acumen

Strong financial knowledge is required. Also critical is actual experience working with numbers in a variety of situations, from contract for difference (CFD) trading to translating objective concepts into measurable items.

Analytical and Strategic Mind

Because of all the data involved, anyone who works in the field should be analytical by gathering information, interpreting it, spotting risks and opportunities, and identifying appropriate strategies for managing financial risk.

Technological Capabilities

Anyone in this field should be able to use software and other technological solutions, such as Risk (VaR) to Risk Scenario tools. In addition, it is important to keep up with the latest technological advancements in financial risk management.

Excellent Communication Skills

Those who work in financial risk management must be able to translate complex financial risks, products, and processes into a language the front office, management, and the board can understand. For this to work well, excellent interpersonal and general communication skills are a necessity.

Financial Risk Management Careers

Financial risk management careers are most often found in financial institutions such as banks, financial services companies, brokerages, and asset management firms. However, there are opportunities in other types of business, as well, such as insurance, software, oil and gas, and publishing companies. The following job roles are the most common:

Risk Analyst or Risk Manager

These financial risk professionals use analytical skills and knowledge of international business and currency markets to examine investment portfolios and analyze the risk involved. They project potential losses and recommend ways to limit risk through diversification, currency exchanges, and other investment strategies.

Credit Risk Analyst

These analysts review and assess the financial history of individuals or companies to determine if they are a good candidate for a loan. They evaluate financial data, such as balance sheets and income statements, to determine the level of default risk and calculate financial ratios to help lenders make comparisons.

Market Risk Analyst

These financial risk management practitioners use knowledge of an industry or sector to research market trends and provide companies or investors with a comprehensive market assessment. The company or investor then uses this information to make decisions about investments and future ventures.

Operational Risk Manager

These risk managers investigate how an organization or business is run and identify potential sources of financial, legal, and reputational damage. The goal is to mitigate as much risk as possible and offset financial losses.

Why Consider a Future in Financial Risk Management?

The future is bright in financial risk management. It is a respected profession because financial risk management professionals are critical to the functioning of a business. As a result, the salaries for these positions are promising. According to PayScale , they can be at an average of about AED 244,000 annually. Its popularity as a career is also on the rise. Positions in the field are expected to increase at a rate of 7% over the next decade.


If you are interested in joining hands with a training provider to help make your FRM journey easier, then Kaplan Professional Middle East is here to offer you the expertise of the industry’s leading financial trainers. If you are looking for an FRM training course in Dubai join us as a student to kickstart your FRM exam preparation.