No business is invincible when it comes to navigating the challenges of risk management.
More than a set of rules, risk management requires enterprise-wide engagement with decision-making processes across the organization at every level. A financial institution’s business requires it to take on financial risks that threaten the company’s profit. Sound financial risk management is what enables the company to combat these risks.
At Siemens Financial Services (SFS), we have developed a strong risk culture – for over 20 years – that is based on clear values. Such a risk culture is the foundation of a successful business and allows us to help steer the company through periods of economic downturn and unexpected pressure.
The backbone of such a risk culture requires not only a tone from the top emphasizing the importance of sound risk management, but also individual responsibility and ownership of each employee.
The development of adequate processes, intelligent business analytics and risk measurement models are essential to each financial institution’s risk management framework. Such a framework requires a comprehensive view on a company’s risk profile from the management board and sound underpinning of risk capital on each of the individual risk categories. The adherence to strict risk processes and to act on an arm’s length basis – in other words, act independently – on every business opportunity whether it is a captive transaction or not, is paramount for any captive financial service provider.
Credit risk management – Never one-size-fits-all.
Intelligent credit business provides the right financial solution for each customer. The resulting credit risk is not a problem per se, however it is important to provide adequate and risk-adjusted pricing of the credit transaction. The foundation of credit risk management is a sound underwriting process. With thorough screening and a careful selection process, underwriting reduces potential defaults before they materialize on the balance sheet. However, while some transactions may look good from a standalone point of view, they may not make business sense from a portfolio or concentration standpoint. This embodies successful portfolio risk management, ensuring that – even in times of economic downturns – losses are limited and do not endanger the entire institution. The key to portfolio risk management is diversification across industries, countries, rating classes and transaction sizes. Risk management is never a one-size-fits-all approach for every business or transaction, but can be carefully evaluated based on comparable transactions, market patterns, and individual assessments.
Operational risk – Beyond internal controls and KYC.
Internal controls and Know-Your-Customer (KYC) checks are serious business. They represent the cornerstone of a proper screening process and thorough organization-wide system. The cost of getting this wrong could have large adverse impacts. However, sound operational risk management also comprises appropriate legal processes, a distinctive compliance framework that fits the individual set-up of the institution, and a comprehensive lessons-learned workflow.
In our investment decisions, compliance is an integral part of the strategic evaluation of the transaction. This entails proper due diligence on involved parties and people, but also confirmation that the overall investment is in-line with our company values. Responsibility and integrity are at the core of our decisions, aiming for the long-term sustainability of our investments.
In best practice approaches, it is important to define a set of key risk indicators as part of an early warning system and an integrated operational risk framework. This helps ensure that potential reputational risks are recognized early and are reduced before they turn into losses.
Market & liquidity risk - It’s an art.
Market and liquidity risks are sometimes considered less important than credit risk within the lending business. This is because with methods, such as matched funding, risks can be minimized to a large extent. However, funding is not always available for long-term transactions at reasonable cost, resulting in liquidity and foreign-exchange risks. In other cases, a portfolio funding approach may be required when individual matched-rate funding is not feasible. These cases require a sound market and liquidity risk management process based on state-of-the art measurement of risks. In addition, market risk must be carefully considered and evaluated against regional regulations, isolated transaction-specific requirements, and – in our case – the backdrop of Siemens’ global portfolio and diversification to absorb any potential loss. At SFS, we always take a thoughtful approach to investing by never compromising on risk over margin in critical markets.
When it comes to risk management, no one can afford to be complacent.
We must thoughtfully utilize technology to improve our data analytics and forecasting abilities. We’ll need the seamless combination of human intelligence and artificial intelligence to remain competitive. The cleaner the data, the bigger the data pool, the “smarter” the technology to sort through data, and the more skilled our workforce is to derive value-added insights will set us up to overcome possibly our biggest and most strategic challenge of all: staying ahead of market disruption.
Composed in collaboration with Dr. Christoph Baumgarten, Dr. Mathias Jais and Matthias Oberlinner.