The Lack of Risk Performance Metrics Impedes Banks

When faced with a challenge, it is important to first ensure that appropriate research is conducted and that decision-makers are provided with sufficient information for corrective action. Having the proper data to make the right decisions is critical because it allows businesses to create and strategic plans while managing change. Every manager knows that it is easy to temporarily improve performance with increased performance monitoring, but the change is rarely permanent. Bringing about permanent change requires managers to have an in-depth understanding of all the processes, performance metrics, and issues faced throughout the organization.

Many banks want to improve risk management performance in order to improve the rate of identification and mitigation of risks. The major issue for banks is that they often have not the right risk metrics or assessments to track improvements in performance.

When implementing a performance management strategy, the first step is to determine current performance before deciding on the organization’s optimal performance levels. This helps banks to assess the performance difference between current and appropriate standards of performance. Banks may then devise methods to achieve ideal performance levels, with periodic evaluations to evaluate the current course of action’s efficacy. It is almost impossible for banks to develop effective risk and compliance performance management plans in the absence of any performance indicators.

The Importance of Risk Performance Data

Banks have a massive amount of risk information in the form of data points, assessments, reports, and much more. The collection of risk management performance data, however, is much less commonly seen in banks. Any bank will be able to tell how many risks they discovered in the previous year or quarter, but only a handful will be able to tell how long it took them on average to find those risks.

Due to a lack of performance data, banks often rely on performance-related risk information. The number of risks detected in a time period can be compared to the number of risks detected in another time period, but the insights obtained from such a comparison are relatively shallow. While the number of risks is an important factor to consider when evaluating a bank’s overall compliance results, it does not provide insight into the risk team’s true performance.

The Lack of Risk Data

A very important factor to consider is that a lack of risk data is often not the problem, but rather a symptom of the real problem the bank faces: a lack of codified risk management. Banks do not have risk performance data because a lot of risk processes are handled manually. Critical risk information is stored in spreadsheets and documents spread out on different servers and email inboxes across the organization.

If a bank wants to keep track of risk performance metrics in such a scenario, it will have to ask its risk management employees to keep track of each action they take. This means that the employees will now have to manage even more spreadsheets, just to be able to report their own performance to the management. This is not a sustainable practice. There’s another problem with this approach – depending on manual data entry means there is no guarantee that the data will be free of human error. Managers need verified data to make the right decisions, not guesstimates.

Picking the Right Metrics

The right insights can only be gained if the right metrics are being tracked. Some metrics provide banks with information about their risk management performance, allowing them to enhance their performance. The mean time to resolution is one such metric, the mean time to mitigation metric measures the time between when a risk is discovered and when it is mitigated – whether by a disciplinary action or improved arrangements to prevent future accidents. This is an important measure because it shows the bank how long it takes the bank’s risk team to mitigate a risk.

Similar metrics can help banks understand their own risk performance. Banks can measure the mitigation time of risks depending on the type of risks that were being mitigated. This will give management insights into what type of risks the bank struggles with the most. Management can then look at better strategies to mitigate those types of risks or can even hire more experts of the domain in which the bank is struggling to manage risks. This provides executive teams far more control and visibility into organizational vulnerabilities and opportunities, which in turn gives them the ability to manage changes to provide desirable outcomes.

Interested in seeing how your organization can track its risk performance through a risk management platform? Get in touch with our risk experts to see a demonstration of Predict360, American Bankers Association endorsed solution for risk and compliance management.