Page 29 - Risk Management Bulletin April-June 2022

RMAI BULLETIN APRIL - JUNE 2022

planning exercises in which the business mix is strategy process. The financial crisis of 2007–08
adjusted according to the changing business demonstrated that during crises the winners of the
environment. In a world of growing uncertainty and next cycle are created. The outperformers often build
disruption, however, the typical three- to six-month on more flexible cost structures; they might be able
planning cycle is proving inadequate. The spectrum of to dispose of noncore assets more quickly, while
outcomes supporting planning are generally unable to focusing on growth. This could involve internal actions
incorporate dramatic technological change, public- to adapt the business model as well as external
health and climate crises, and volatile social-media opportunities, which are seized using available
trends. The more disruptive changes mean that financial resources and skills. The winners emerging
strategies must be stress-tested against shorter from the financial crisis looked at more than the
timelines and scenarios have to account for a broader downside of strategic scenarios; they saw upside, too,
set of potential outcomes. At the same time, banks and sought to invest in strategic optionalities that could
need to develop dynamic capabilities and structural provide competitive advantage. The current
resilience assets: semiconductor shortage in the auto industry provides
Y Dynamic capabilities. These are critical skills that one example of a resilient strategy through a crisis. In
involve foresight—the ability to anticipate 2020, Toyota did not cut back on orders of this
disruption—and informed action, incorporating relatively low-cost item at the beginning of the
implications into business decisions. To develop pandemic, while other OEMs did just that. The result
them, banks will need to invest in data and was that for a time Toyota was better able to maintain
information gathering to analyze the potential production and meet demand.
implications of expected disruptions before they
happen. The specific practices include continuous Lessons for banks
scenario analyses, war-gaming, and fast decision
The experience of corporates provides banks with
making within corporate governance.
lessons for improving how they address nonfinancial
Y Structural assets. While capital and cash are key risk. Corporates continue to develop their ERM
resources to compensate for risks, organizations systems, going beyond the formal processes. They are
need to pay more attention to other resilience focusing on embedding risk management in the front
assets in order to manage disruptions effectively. line and elevating strategic resilience questions to the
This includes developing organizational executive team and the board. Banks can profitably
capabilities, strengthening the supply chain, heed these steps, as they lead to a more advanced
deepening technological capabilities, and approach. Banks have a second-line focus for financial
safeguarding market positions, reputation, risk, which they otherwise tend to replicate for
sustainability profiles, and other societal nonfinancial risk. Banks can become better adjusted to
expectations. the changing risk landscape by effectively embedding
These structural assets relate to common risk the management of nonfinancial risk into the front line
taxonomies. However, leading corporates are including and rethinking their approach to risk appetite (beyond
them in the strategy debate, moving beyond the the current cascading of capital metrics, or an arbitrary
question of controls. They are looking at fundamental selection of KPIs and KRIs). The approach ensures that
capabilities and structures that mitigate risks. The key banks comprehend the full and varied spectrum of
tools are broad-range scenarios (in terms of outcomes nonfinancial risks and understand that a generic,
and time periods) used as starting points to identify governance-focused nonfinancial-risk system is clearly
risks and risk-mitigation requirements. inadequate. Like the leading corporates, banks can
build an effective approach to nonfinancial risk by
Creating strategic options improving the management of relevant processes and
The opportunity question arises in any well-designed systems and strengthening resilience overall.

27