Compliance with the Bank Secrecy Act (BSA), the primary law that directs banks to develop Anti-Money Laundering (AML) programs, has always been challenging. So, it should be no surprise that as cybersecurity threats increase in the modern era, AML compliance has become increasingly difficult.

Financial Institutions (FI) and Non-Bank Financial Institutions (NBFIs) struggle under the weight of risk management and compliance obligations. They often enlist software vendors to help them fulfill regulatory requirements to support their financial risk management strategies.

Enterprise Risk Management (ERM) software empowers businesses in the financial services sector with compliance management protocols and comprehensive risk assessments. These tools help financial firms make better decisions and transform their business processes to mitigate identified risks.

ERM connects a firm’s Governance, Risk, and Compliance (GRC) objectives to operations and performance goals. It provides insightful reporting, pre-built risk registers, templates, customization, and expertise when a financial firm needs it.

Financial risk management is the process of recognizing financial risks, analyzing them, measuring their volatility, and making investment decisions based on accepting or mitigating those risks.

These can be quantitative or qualitative risks, and the work of a financial manager is to employ the risk management tools at his disposal to protect against them.

For example, in the banking sector, the Basel Accords are a common set of standards that international banks have adopted to track and report credit, trading, and liquidity risks.

Financial managers must consider various risks before suggesting investment strategies, such as operational risks for banks, foreign exchange risks, credit risks, and reputational risks.

What Is Financial Risk Management?

Financial risk management involves assessing and mitigating risks to a financial firm’s investment portfolio and reducing operational risk within its IT systems and business models. Since FIs and NBFIs handle sensitive information, they need to determine the cybersecurity risks of their organization and of the vendors they use.

As security risk management becomes equally crucial to credit risk management, FIs and NBFIs must address information security as part of their overall asset-liability management and decision-making programs.

What is Credit Risk

Credit risk is the likelihood of a financial loss due to a borrower‘s failure to repay a loan. Credit risk is the danger that a lender may not obtain the owing principle and interest, resulting in a disruption in cash flows and higher collection expenses.

Lenders can reduce credit risk by examining a borrower‘s creditworthiness characteristics, such as existing debt load and income.

Although it is hard to predict who will fail on commitments, correctly analyzing and managing credit risk can help to mitigate the severity of losses. Interest payments from a debt obligation’s borrower or issuer are a lender‘s or investor’s incentive for making riskier credit decisions.

What Are The Types of Credit Risk?

Individual credit scores can be established by rating organizations, which banks can use to assist in estimating default risk. The risk of default is classified into two types: investment grade and non-investment grade. These are the two primary categories, although there are other sub-categories:

Default Risk

The most prevalent credit risk is default risk, which refers to the chance of a borrower failing to return their obligation in full. This might lead to losses for the lender or investor, mainly if the borrower cannot make any repayments.

Spread Risk

Spread risk is caused by changes in the credit spread, which is the difference between the interest rate on a hazardous loan instrument and the interest rate on a risk-free debt product.

Downgrade Risk

The likelihood of a credit rating agency downgrading an individual’s credit rating is called downgrade risk. A downgrade can negatively influence the borrower‘s borrowing costs and the overall value of their outstanding debts.

Recovery Risk

The uncertainty regarding the amount that may be recovered from a borrower in the case of a default is referred to as recovery risk. Factors such as the quality of the collateral and the legal structure regulating debt recovery might impact this risk.

Banking Risk Management Challenges

Risks faced by FI and NBFI are not for the faint of heart. Exchange rates, financial market volatility, interest rate risks, and liquidity risks are all challenging aspects of the industry. Various U.S. sanctions rules, enforced by the Office of Foreign Assets Control (OFAC), also require financial firms to monitor customer activity that should be reflected in all institutions’ risk management processes.

In addition, as we mentioned earlier, compliance with the BSA is a high priority for FIs and NBFIs. The BSA directs financial firms to develop AML compliance programs.

Specifically, “Know Your Customer” (KYC) policies and procedures are required to identify suspicious activity. Creating and adhering to KYC policies are critical for regulatory compliance and national security.

Consumer Accounts

For consumer accounts, KYC policies and procedures require collecting all customers’ names, addresses, dates of birth, and other identifiers (Social Security or passport numbers, for example). AML compliance rules require businesses to document this information to prove that the firms have performed due diligence and followed risk management processes correctly.

Commercial Accounts

For commercial accounts, FIs and NBFIs must not only collect personal information about the individuals using the accounts. They must also collect business information such as articles of incorporation and Tax Identification Numbers (TINs).

Records Retention

AML and KYC regulatory requirements require that most documents collected when onboarding and transacting with customers must be stored for five or seven years. Since this documentation is now often recorded electronically (such as scanning or using online account opening procedures), this means customer data must be retained on your corporate networks or with a cloud service provider.

FIs and NBFIs handle an immense amount of Personally Identifiable Information (PII) for their clients. Requirements to retain this information for several years compound the risk a bank must consider in its risk management plan for information and data security.

What Tools are Used to Manage Credit Risk?

It might be challenging to identify a credit risk. As a result, financial institutions frequently use various credit risk management tools and methods to guarantee that their business faces little risk while maintaining maximum revenue. We’ve laid out some of the credit risk management approaches that are employed and how they operate below:


Know Your Customer (KYC) and Anti-Money Laundering (AML) processes are typical in banking regulations. They are intended to ensure that your customers are who they claim they are and avoid fraudulent financial activities. You may do one or both of these operations depending on local restrictions. Typically, this is accomplished by running a client’s ID and proof of residence information through a database to confirm their identification.  

Credit evaluation

Traditional credit scoring methods sometimes entail checking a potential client’s credit score via a database. In the United States, this might be an agency like FICO or Vantage Score, which provides an electronic value to the financing company that they can use as a Key Risk indicator to evaluate whether or not to provide a loan. Although credit scores indicate a person’s financial standing, they have also been criticized for being too narrow.

Macro and Micro Loans

Credit risk may usually stem from more than one client. It might instead constitute a portfolio risk. A corporation can detect threats or problematic lending trends by measuring the quantity of micro (individual loans) and macro (groups of loans). This assists the company in maintaining a stable debt-to-capital ratio and providing competitively priced loan solutions.

Credit Risk Management Software

Credit risk management solutions are the intersection of technology and credit risk. More and more lending institutions are developing methods to analyze credit risk inside their operations. They will frequently collaborate with a software supplier or acquire a ready-made solution to integrate into their broader organization and utilize for risk analysis. These systems may include several features tailored to the lender‘s unique requirements and more general software.

Risk Management Process for Banks

A formalized and precise risk management plan for a bank serves as a blueprint for enhancing performance by disclosing critical dependencies and control effectiveness. By properly implementing a strategy, banks should be able to better allocate time and resources to what is most important.

The size, brand, market share, and numerous other features dictate a bank’s risk management program. That said, processes and policies must be standardized, meaningful, and actionable.


To develop a meaningful risk management program, bank asset managers must create an enterprise-wide risk mapping process. Most effective risk identification techniques focus on the root cause. Focusing on the root cause enables you to identify systemic problems to establish controls that remove the cost and time of duplication of effort.

Analysis and Management Methodology

Using standardized methods to assess risk is the trademark of a world-class risk management process. Collecting and analyzing data can be cumbersome, but a consistent approach is essential to prioritize corrective actions effectively.


Risk mitigation is the process of decreasing exposure to risk and attempting to reduce the likelihood of an issue. Primary risks and concerns must be continuously addressed to guarantee that the institution is protected as much as possible.


Risk measurement is a continuous process. It entails running tests, gathering metrics, benchmarking against previous results, and fixing occurrences to verify that controls are operating effectively.

Monitoring also provides an opportunity to identify and address emerging trends to assess whether or not progress is being made on specific initiatives.


Establish relationships among risks, business units, remediation activities, and other aspects to provide a unified portfolio across the institution.

This approach helps you to recognize upstream and downstream dependencies, systemic market risks, and opportunities for centralized controls. Breaking down silos between business units and initiatives allows you to leverage resources and expertise.


Insightful reporting is essential to monitor the progression and success of the risk management program. It provides visibility to stakeholders, documents opportunities to reduce risk, and drives investment to continuously improve regulatory compliance efficiency.

Where Enterprise Risk Management Overlaps with FI Compliance

Financial firms have always been highly regulated. Now, because their compliance obligations keep overlapping with routine business operations, the firms’ Enterprise Risk Management efforts overlap with their compliance efforts.

For example, FIs and NBFIs increasingly allow for online account opening. These processes require endpoint security and encryption to ensure ongoing data protection.

When firms rely on technology vendors for parts of the account opening process, they must also assess and monitor their vendors’ cybersecurity measures.

Those tasks are arduous under the best of circumstances. Achieving compliance becomes overwhelming when institutions attempt to handle the burden with spreadsheets, email, and manual procedures.

Strategies for Monitoring Vendors

Vendor management in the financial arena has long been a compliance hassle. Not only do FIs and NBFIs need risk management processes to verify that their vendors have stable cash flow and will remain financially solvent, but they must also ensure their vendors have sound cybersecurity practices so they can be trusted to handle sensitive data.

Many FIs and NBFIs incorporate System and Organization Controls  (SOC) 1, SOC 2, SOC 3, and Payment Card Industry Data Security Standard (PCI DSS) reports in vendor management practices.

That’s a good start, but vendor risk management can’t end there. You must leverage tools to manage policies and procedures, streamline workflows, document communication, maintain audit trails, and provide reporting.

Enhance Risk Management with Automation from RiskOptics ROAR

RiskOptics ROAR provides real-time insight into threats. Instead of using spreadsheets to manage your compliance requirements, adopt Compliance tools to streamline evidence and audit management for all your compliance frameworks. It also serves as a risk and workflow management software that is intuitive and easy to use.

It is a single source of truth that ensures your organization is always audit-ready. Policies and procedures are revision-controlled and easy to find in the document repository. Workflow management features offer easy tracking, automated reminders, and audit trails. Insightful reporting and dashboards provide visibility to gaps and high-risk areas.

With RiskOptics ROAR, you can distribute due diligence questionnaires, store completed questionnaires, track status, and assign a risk score based on responses. Institutions can also perform risk assessments, create business continuity plans, map controls across frameworks, and determine the additional steps to mitigate risk.

Schedule a demo today for more information on how the RiskOptics ROAR platform empowers financial institutions.