The Critical and Emerging Role of Bank Chief Risk Officers

By Roshni Patel, Global Head of Risk Solutions, Quantexa

If you want to understand why something has gone awry at a bank, ask the Chief Risk Officer (CRO). They are typically the most informed resource and possess in-depth knowledge of risks that upend operations and losses, hurt reputations, and decrease customer and shareholder trust. 

The job of identifying and managing risk is more important than ever, especially as today’s financial landscape continues to evolve. A bank’s CRO is accountable for the regulatory environment and managing risk and compliance, as well as instilling a bank-wide culture of adhering to best practices and industry standards. CRO jobs are complex, typically overseeing risks from an operational, financial, compliance, and non-financial risk basis. The ability to identify and adapt to rapidly changing risks requires a forward-looking, transformative technology infrastructure that empowers CROs to make informed decisions based on accurate, connected and clean data.

The stormy risk environment.

Today’s risk environment remains challenging, especially with an uncertain US and international economy, and increased pressure from businesses struggling to survive. With supply and demand issues that can mean the difference between customers’ success or failure, and 10 consecutive US Federal Reserve rate hikes between March 2022 and May 2023, managing risk requires consistent monitoring and business intelligence. 

On the upside, according to Mordor Intelligence, the US digital lending market alone will go from $408.77 billion in 2023 to $716.23 billion by 2028. The combination of positive and negative developments means that bank CROs should strive for a balance sheet that shows a minimum number of high-risk investments, while being able to detect asset deterioration quite early on. 

Regulatory changes further exacerbate today’s risk environment. While the Dodd-Frank credit requirements, including stress-testing, loosened, the Federal Reserve possessed the ability to apply them to banks exceeding $100 billion in assets. Specifically, “The Federal Reserve assesses whether Bank Holding Companies (BHCs) with $100 billion or more in total consolidated assets and U.S. Intermediate Holding Companies (IHCs) are sufficiently capitalized to absorb losses during stressful conditions while meeting obligations to creditors and counterparties and continuing to be able to lend to households and businesses.”

Some major banks are strategically growing by expanding into verticals that are under-represented in their current portfolio. There is risk associated with the vertical expansion strategy because banks rarely have the requisite knowledge about customers in a new market or digital processes to help provide critical insights. With Decision Intelligence (DI), CROs can evaluate several factors, such as the business customer’s supply chain and ecosystem connections.

Managing macro and micro risks.

Smaller and regional banks should proceed with caution, especially in areas such as over-leveraging long-term treasury bonds, while larger banks should strive to demonstrate higher levels of due diligence, and meticulous active portfolio management. Regardless of bank size, CROs should do a deep dive into not only historical lessons, but also their own bank where they can peel back successes and failures and apply key learnings to go-forward strategies. With a better understanding of what happened and why, they can chart a path to improved monitoring, as well as conduct new, unprecedented levels of risk assessment. These factors will help establish early warning processes and provide a predictive approach to risk mitigation.

Another risk factor is counterparty intelligence. For many, understanding counterparties, or lack thereof remains a key challenge. Many banks do not have the technology to provide critical counterparty insights. CROs should be able to determine who the counterparty is, and if there are risks that could result in unrecoverable losses and exposure. 

Related, cost reduction, efficiency, and process improvement are an ongoing goal for just about every bank. These factors are not mutually exclusive. Manual processes (event / regulation driven), by default, are error-prone, and often lead to duplicative activities. Transitioning from manual to digital enables banks to shift from resource-intensive to efficient, accurate, accessible data monitoring, capable of helping CROs manage and improve risk.  

The path forward: replacing data silos with AI and Decision Intelligence to provide a single source of truth. 

Spreadsheets, branch-specific networks, binders, file cabinets, and even laptops contribute to a multi-tiered challenge. First, the sources are disparate, disconnected, mix of structured and unstructured and contain multiple logins, making it impossible to seamlessly bring datasets together. Next is the issue of clean data. Regardless of where it is located, if it isn’t accurate, CROs are unable to leverage the data with the confidence they require. Clean, up to date, connected data that uses both Artificial Intelligence (AI) and Decision Intelligence (DI) is critical in allowing the CRO to assess the market conditions and trends, including exposure, supply chain, second order risk impact, and other insights such as reputation risk. 

AI can analyze massive amounts of data, making predictions and recognizing patterns, while DI makes AI data actionable. In essence, AI is a subset of DI, and together they provide a viable, digital alternative to the disparate data issue plaguing most banks.

With DI, banks can identify hidden risks through a contextual, connected view of internal and external data. Banks can unify and derive context from structured data (organized and formatted such as banking transactions and contact lists) and unstructured data (no predefined format such as multimedia and mobile data). DI solves the data management conundrum (better alignment to principles like BCBS239) while providing CROs with technology that helps identify financial and non-financial risks.  

Together, this new level of intelligence provides insights on relationships between various data points, giving CROs a more precise picture of risk exposures and potential vulnerabilities that they can trust. The end game is to provide bank CROs with that technology that helps identify and address risks before they escalate into issues, protecting the top and bottom line. 

Quantexa is a data and analytics software company focused on Decision Intelligence that empowers organizations to make trusted operational decisions by making data meaningful. Quantexa’s technology has been used by banks and governments globally, including BNY Mellon, HSBC, and Standard Chartered Bank, to reduce money laundering and other financial crimes, and improve data management.

Using advancements in big data and AI, Quantexa uncovers hidden risks by providing a contextual, connected view of internal and external data in a single place. The company’s offerings encompass data management, KYC, customer intelligence, financial crime, risk, fraud, and security, throughout the customer lifecycle.