Three risk management strategies for banks through uncertainty

Recent banking news has put a spotlight on risk management strategy and governance. For many companies, black swan events can happen at any time and take any form—and by definition, they are difficult or sometimes impossible to anticipate. Because these events are an unfortunate inevitability, a thorough asset-liability risk management strategy that includes identifying any risks related to your commercial real estate portfolios are imperative to maintaining trust and thriving through periods of market uncertainty.

As we continue to strive for business continuity in an unstable risk environment, its vital to approach risk management with a flexible and dynamic strategy. We’ve identified three steps to evolving and adapting risk management practices to proactively respond and protect your real estate assets when the risk climate changes.

No two crises are alike. Following any market disruption, financial services companies should first evaluate emerging risks and the business’s exposure to them. A proper assessment should include the pace at which new concerns are emerging and new areas of instability like changes in liquidity and interest rates. In addition to the impact on internal business operations, a company should also know the broad implications that risks will have on the industry, economy and society.

Internally, and preceding any market impact, businesses should also analyze their preparedness to absorb and tolerate risk defined by economic factors, consumer confidence and any critical balance sheet gaps. By assessing the company’s current strategy and controls in-place, risk managers can evaluate exposure to systemic risks and other worse-case scenario events. The business can then model a proactive and protectionary strategy for responding to those threats.

Finally, a thorough risk evaluation analyzes the potential for outlying risk factors. Standard assessments identify predictable risks, but a destabilizing event could cause a ripple effect, ultimately catalyzing threats beyond the initial event. Unforeseen events are the biggest hazard to a business. To avoid risk, cast a wide net to detect areas of instability even before they emerge.

All businesses have some appetite for risk. Risk tolerance will vary from business to business and ebb and flow with internal and external factors. Once a company has an acute understanding of the market dislocation and associated risks, the next step is to align risk tolerance with the company’s business objectives. Company culture and values, customer behaviors and long-term growth goals should all impact the company’s risk aversion and acceptance in a changing economic market. In addition to internal alignment, the company should also determine its risk appetite related to global trends and macroeconomic events as well as how competition is adjusting to emerging risks.

Likely, a new risk environment will require companies to reassess current business goals. Historically, risk assessments focus on long-term business objectives, but following a black swan event or other massive shock to the economy, risk management teams must take a closer look at short-term objectives. By looking at the near-term risk appetite, companies can react quickly to changing market dynamics.

A market with increasing uncertainty is formidable and unnerving, but with creativity and innovation, companies can manage risks. It is important that companies respond by executing a comprehensive risk strategy to avoid any impact on business operations. Maintaining business-as-usual practices could serve to exacerbate risks. The best approach to executing a risk management strategy is to partner with experienced third-party advisory for creative problem solving. Together, this team can directly and strategically adjust business operations to reflect both ongoing and emerging risk.

Automation and new technologies are central to executing a risk management strategy. Implementing automated procedures and governance protocols can eliminate errors, more quickly analyze market data to create a better understanding of the risk climate and streamline workflows to allow professionals to focus on high-value risk mitigation tasks. JLL’s Corrigo CMMS is one example of technology that is automating asset management processes and maximizing efficiencies within this space. This tool has tremendous value in times of heightened risk.

Beyond technology, companies should develop a crisis-response playbook with well-rehearsed strategies to maintain business operations through a crisis. The playbook should include worst-case scenario planning for times when risks are escalating or rapidly emerging. A pre-selected crisis response leadership team should also be ready to implement this response, working alongside risk management advisors to create resource plans, communicate with other team members and ultimately create stability throughout the organization.

Of course, don’t discount the company’s own experience or competitor experiences working through a destabilized marketplace. Reviewing post-mortem breakdowns will help improve risk management strategy and create a more effective and bespoke response to future risks.

Navigating through a downcycle or more acute crisis is never a welcomed experience. It is marked by concern and fear—but working alongside an experienced advisory team to evaluate the risk environment and evolve the in-place risk management strategy will dispel uncertainty and create stability throughout the organization. Downcycles are a certainty in business. A proper response helps to ensure the company is around for the next upcycle, too.