An efficient & successful ERM – Enterprise Risk Management can ensure that risk taken by banking sectors is compensated by a proportionate level of both risk and reward. In the banking sector, managers are integrated with high levels of risk factors with the uses of integrated models. It delivers tangible benefits in terms of cost association, compliance integration and better risk management concepts that give better pictures of the risk being faced by the bank. The risk management process in organization becomes more robust with the specific data structure, a common technological architecture supporting the entire banking process.

Risk Management factors in the banking sector are in limelight specifically after the recent financial crisis & turbulence that have impacted the very existence in the banking industry as a vital concept. Not only in a bank, even in other multiple government bodies, it has recognized that repercussions and financial & operational issues of not managing the risks has led them to enact several regulations to control such impacts that arise in the banking corporation and operations.

Importance of ERM as Future in Banking Sector

However, most of the banks have observed basel norms as another mandate situation of regulatory compliance instead of a tool for effective risk management factors which have resulted in reality as a pure eye wash act to deal with the interest of regulatory bodies. The conditions and issues resulted was mainly on account of banks under constant scrutiny and rapid fluctuating demands of the regulatory environment and authorities.

Moreover, given the breadth and depth and geographical spread of banking business and operations, banks realized that basel norms are not that much comprehensive and strong enough to establish a comprehensive risk management system which could help the banking sector to recognize, mitigate and control banking risks across enterprise in all the ares and at the same time rationalize and conceptualize their ERM practices within the organization.

COSO – Committee of Sponsoring Organizations of the Treadway Commission has introduced Enterprise Risk Management Frameworks or Systems for banking and other financial enterprises and assisted them to identify and adapt new approaches to drive their initiatives in risk management beyond Basel norms and regulatory compliances. The COSO ERM approaches have all those components and ideas that could assist and help the banks to stand an opportunity to derive business value while meeting compliance requirements and expectations.

Initiating and Implementing Enterprise Risk Management

Globally banks are recognizing that they need a more pragmatic approach for managing a growing abundance of risks reopening the banking and financial industries landscape. ERM approaches help banking sectors to move away from the “Silo” norms to risk management to the holistic approach to monitor and control enterprise wide risks. ERM also helps the banking organizations and other financial institutions to eliminate duplicates, redundancies in risks and related control procedures that exist mainly because different groups define the similar kind of risk differently, implement different control procedures and utilize different analytical models  based on different concepts, assumptions and underlying data sets.

A first step towards initiation of ERM programs in the banking organization begins with understanding the risk appetite, adapting KPIs to setting the tone for risk governance and nourishing the risk culture within the organization. Followings are the ERM analytical models that includes:

  • Identify: Identity & creation of standardized, conceptualized and industry-wide framework i.e. risk identification, views, appetite and culture. Proper implementation of ERM approaches help to understand needs, assumptions and analytics to reduce risk models in the banking sector.
  • Analyse: Analysing & setting complete risk objectives and management to ensure effective alignments with banking and corporate objectives, risk appetite and culture.
  • Action: Ensuring risk management remains independent of corporate lines, objectives and scenarios. This includes changing reporting lines so that the risk management factors and functions can be directly reported to the board of directors, members and staff rather than CEO, CFOs, and senior management executives & rewards can be given as short-term gains based on institutional performance, compliance and regulatory requirements. It will create incentives and maximize short term gains for top management staff, even if it increases the institutions’ long term risk exposure.
  • Monitor: Monitor & expand the internal auditory process to execute a strong governance and compliance model for clear, transparent and independent review so that valuation & decision related to risk management model can be made effectively. Establishing control, monitoring risk functions and mitigating vulnerabilities after setting up a system for banks so that they can effectively manage and trace risk profiles.
  • Control: Control risks domains, areas and risks functions that define boundaries of banking risk management functions for the enterprises. One the KPIs and boundaries are settled down, it will be helpful for the banking institutions to to focus on the move and identify the threats, factors and vulnerabilities. It will assist top management in recreating risk management functions for individuals and organizations as a whole.


Enterprise risk management framework and approach is the blend of top to bottom and bottom to top approach, where banks need to work closely with the effective COSO to understand the reasons of financial drops and shortfalls. ERM helps to understand the vision and strategy to manage risk functions, appetite and culture accordingly in order to drive them to set the scenario of risk factors. ERM also defines the loopholes in existing risk functions and practices and awareness in the organization. Banks through this blended conceptual approaches can set up appropriate risk governance structures and to define accurate risk objectives which are aligned to the strategic areas of the organization.