McKinsey
Since the financial crisis of 2008–09, financial institutions have significantly expanded their risk and compliance functions. And with increased headcount came increased complexity. Many institutions grew rapidly and piecemeal, often scrambling to respond to regulatory feedback or indirect pressures. Most banks today are consequently looking to improve productivity. Risk management, however, has often been off-limits for cost reductions. Actions to reduce cost required cutting through the complexity and therefore were viewed as hazardous, given the nature of risk and the expectations of regulators. Faulty moves to make risk management more efficient can in fact cost an institution significantly more than they save.
In our experience working with leading banks, the most potent levers for increasing risk-management effectiveness, if applied in careful sequence, also improve efficiency. A well-executed, end-to-end risk-function transformation can decrease costs by up to 20 percent while improving effectiveness, transparency, accountability, and employee and customer experience.
Banks looking to transform risk management can focus on four mutually reinforcing areas: organisation, governance, processes, and digitisation and advanced analytics. While enhancements isolated in each area can boost both effectiveness and efficiency, the true potential comes from tackling them in sequential order. Organisational optimisation facilitates governance rationalisation, which facilitates effective streamlining of processes, which enables digitisation and advanced analytics to yield maximal benefit.
End-to-end risk transformations can reduce the cost base while meaningfully improving the quality of risk management. Four initial steps are essential to success.
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Transformations involve significant behavioural shifts. Addressing new demands and building new skills requires careful change management and patient leadership sustained over a multiyear time horizon. Successfully transformed organisations know, however, that the rewards—greater risk-management effectiveness at lower cost—are well worth the challenge.
This article is an excerpt from the McKinsey on Risk article, Transforming risk efficiency and effectiveness.