As is often the case when money, finances and technology are involved, one of the most significant factors bankers and credit union executives have to consider is risk. But what does that mean, exactly? Risk manifests itself in several ways in the financial services industry. Defining risk is often dependent upon the context of the conversation, or with whom you’re discussing risk.
To help understand the different flavors of risk in financial services, here are some common definitions of several types of risks we encounter in the industry: Strategic, operational, reputation and regulatory.
Strategic Risk: This is commonly defined as the current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation of decisions or lack of responsiveness to industry changes.
Operational Risk: The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Operational risk also refers to risk to earnings or capital because of problems with service or product delivery.
Reputation Risk: The risk of perception. This is the potential for losses as the result of events that might negatively affect the institution’s reputation, whether or not the institution has actually made a mistake. Lapses in strategic, operational or regulatory risk can harm a bank or credit union’s reputation.
Regulatory Risk: One of the easier types of risk for bankers to understand, regulatory risk as it applies to a bank or credit union is derived from the institution’s posture in relation to any applicable laws or regulations.
These are just four types of risk a financial institution must take into consideration simply as a consequence of being in business. However, the appropriate considerations toward compliance and risk management provide a framework within which the institution can generally keep it under control.