Risk Management Strategies for Newly High-Risk Areas in Financial Institutions

In the wake of the COVID-19 pandemic, financial institutions now face emerging risks that have altered the landscape, highlighting the evolving need for effective risk management strategies in an ever-changing environment.

While cybersecurity and Bank Secrecy Act anti-money-laundering compliance addresses familiar risks, new risk areas now present their own challenges because of unforeseen changes in the following:

Talent Management

The COVID-19 pandemic had an unprecedented, far-reaching effect on how many institutions began managing the workforce after office and branch closures made remote work necessary. Some organizations transitioned smoothly, others struggled, but few could dampen the rising employee stress levels felt across the financial industry. The resulting surge in employee turnover then brought talent management into the emerging high-risk landscape.

Talent Management Risks

Risks associated with talent management risk can be deconstructed as follows below.

Gaps in Critical Skills

Departing employees took their skills with them, often leaving disruptions to work volume, which proliferated strain and disengagement on people who were already stressed.

Challenges Retaining and Attracting Top Talent

With much of the workforce no longer restricted to physical locations in their local communities, a wave of employee relocation was felt throughout the finance industry and beyond, which escalated competition among institutions trying to attract and retain top talent.

Heightened Focus on Development and Training

Given employee turnover and the emerging need to cross-train critical skill sets, institutions need to prioritize training and development and increase access to related resources.

Possible Risk Management Strategies

To guard against significant disruptions in operations, institutions could employ the following strategies.

Employee Investment

Providing employee training and development opportunities fosters an environment of high engagement and may help attract and develop crucial skills. Investing in job perks and providing competitive compensation and benefits shows employees they’re valued by the institution which could lessen turnover rates.

Diversity, Equity, and Inclusion (DEI)

Showing a true commitment to building a workforce that’s both diverse and inclusive of a wide range of backgrounds fosters innovation and can enhance the overall performance of your organization. It may also serve to attract new talent and enhance your institution’s reputation.

Employee Performance Management

Dedicating the time and resources needed to provide consistent performance feedback to employees will strengthen the organizational culture and retain high-performing personnel.

Organizational Culture

A strong organizational culture has always helped retain employees and keep them engaged, and this is even more important to a workforce changed by the COVID-19 pandemic. With the surge of employee turnover and competition to attract and retain top talent, neglecting your organization’s culture presents a significant risk to the ability maintain a competitive edge.

Organizational Culture Risks

Some risks associated with organizational culture include:

Remote Workplace

Pandemic-related disruption wasn’t limited to the workplace as employees also struggled to manage their personal, familial, and professional commitments in a drastically changing environment. But switching to a remote model became the silver lining as many employees saved on commute time, which helped manage other competing obligations.

However, some institutions struggled with fostering and maintaining a creative and collaborative workforce within the remote work environment. Others that established mandatory return-to-office edicts may be faced with continued turnover as employees see the flexibility of remote work as the new standard.

Employee Health and Welfare

Many employees have reevaluated their work-life balance in times of increased personal stress and economic uncertainty. Many organizations have stepped up their approaches to how they regard employee mental health and well-being. This means that those that fail to do so may encounter ongoing turnover, including the loss of top talent.

Continued commitment to employee health and welfare as an ongoing focal point of organizational culture can help mitigate employee turnover and increase workforce productivity.

Possible Risk Management Strategies

To help build a strong organizational culture, management should:

  • Define and communicate the organization’s values and mission statement in clear terms. Messaging should encourage positive, ethical behaviors that support the institution’s goals and long-term corporate strategies.
  • Solicit feedback from employees regularly and respond to their feedback with integrity.
  • Strategize how to alleviate concerns and implement corrective changes when plausible.
  • Incorporate the use of online tools to facilitate face-to-face interaction between team members, which can help foster a better sense of connection and collaboration among employees working in separate physical locations.
  • Be transparent and provide open communication so that employees feel comfortable expressing their thoughts and ideas to leadership. Doing so helps to create a safe and supportive workspace where employees can thrive.

Economic and Political Volatility Risks

While many disruptions initially brought on by the pandemic have subsided, widespread economic and political volatility persists. Supply chain demands present less of an issue, while the following areas seem more volatile:

Increased Market and Interest Rates

The Federal Reserve’s attempt to curtail inflation by raising interest rates by raising interest rates exposed many institutions to significant fluctuations in the value of financial assets and liabilities.

Risk to Liquidity

Rising interest rates have meant decreasing value of certain financial assets, like bonds, for some institutions.

Regulatory Risk and Uncertainty

Changes in the US political landscape can bring uncertainty over the future of banking regulations. With the two primary political parties taking vastly different approaches to regulatory oversight of financial institutions, organizations are left uncertain how to prepare.

Possible Risk Management Strategies

To mitigate the response to unexpected events, management can employ some of the following tactics:

Maintain a Diversified Investment Portfolio

Institutions can mitigate exposure to any single investment and minimize loss in a downturn by spreading investments across different asset classes, sectors, and geographic regions. They can diversify while meeting the bank’s investment objectives and observe board-approved risk appetites while meeting regulatory requirements.

Implement Hedging Strategies

Hedge fund investing can help minimize potential loss in volatile markets by limiting downside risk while still participating in upside market gains.

Environmental, Social, and Governance

Societal concerns relating to environmental, social, and governance issues aren’t new, but they have garnered increased media attention, particularly in the wake of the pandemic.

ESG Concerns

Ignoring ESG concerns in branding strategy and bringing services to market could place an institution at a significant strategic disadvantage.

Concerns Over Climate Change

Climate change concerns have become part of the national conversation and can be relevant to selecting between competing service providers, including financial institutions.

In response to investors needing consistent guidance regarding climate-related risks, the SEC proposed rule 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors.

These proposed SEC climate-disclosure requirements would standardize the climate disclosures of public companies. Companies would need to disclose an accounting of their greenhouse gas (GHG) emissions, imminent environmental risks, and the measures they’re taking to face them.

The focus would be on climate-related risks likely to have a material impact on the organization or their financial statements. Organizations would be required to describe both actual and potential impacts of climate-related risks on their strategy, business model, and outlook.

Social Justice Issues

Social justice issues remain at a high. Other related issues such as DEI, labor standards, and basic human rights across the globe continue to fuel national and political conversations, highlighting the importance of responsibility, accountability, and sustainability.

Reputational Impact

Managing the ESG expectations of customers, employees, and the local communities where organizations operate has changed how financial institutions position themselves within the market, and how they differentiate themselves from their competitors.

Possible Risk Management Strategies for ESG

To manage risk associated with ESG, start by start by conducting an assessment.

Measuring the potential environmental impact of your institution may be the first step in managing ESG concerns before any unknown issues could have a reputational impact on the organization. The assessment allows the company to mitigate any negative exposures which may exist and can also provide the opportunity to tout the company’s ESG success stories.

Institutions that proactively address ESG concerns can leverage those actions into positive media campaigns geared toward attracting and maintaining customers within their local communities.

We’re Here to Help

For guidance navigating high-risk areas in your financial institution contact your Moss Adams professional.

Special thanks to Colleen Rozillis, Partner, Environmental, Social, and Governance Services, and Brett Addis, Director, Human Capital Advisory Services for their contributions to this article.

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