The future of risk management in the digital area

McKinsey&Company in collaboration with the Institute of International Finance

We collaborated with the Institute of International Finance (IIF) and more than 50 institutions around the world, including banks, regulators, and fintechs, to explore critical questions on the future of risk management. This report aims to answer these questions and shares insights to help organizations navigate a digital transformation of the risk function—now and in the long term.

Digital is the new normal. It has already transformed industries such as media, transportation, and retail and is now sweeping through financial institutions. But when it comes to a financial institution’s risk function, unique challenges and opportunities accompany digitization. Global CEOs and CROs tend to be cautious when considering the very idea of a digital risk transformation, wondering just how far they can automate crucial processes and rely on automated decisions. From our conversations, numerous questions have arisen around the impact of digitization on the risk function’s mandate, role, and organization (including the lines of defense); the capabilities, talent, culture, and ways of working required to deliver a digitized risk function; how to embark on a transformation program that digitizes the risk function; and what impact such a transformation would have.

To answer these questions, the Institute of International Finance (IIF) and McKinsey & Company have conducted a global, comprehensive survey of more than 30 banks to develop an industry perspective. We hosted ten sessions with the working group, in which participants discussed a defined topic for two hours. These topics included important digital themes such as automation, analytics, and banks’ transformation approach, and were moderated by a McKinsey expert on the topic. We also conducted more than 20 in-depth interviews with banks, regulators, supervisors, and financial and regtech start-ups to learn more about out how digital risk trends and technologies affected their role and the measures they had undertaken in response.

As a result of our joint work, we have prepared this report, The Future of Risk Management in the Digital Era, to help organizations navigate a digital risk transformation, now and in the long term. The report aims to answer the critical questions posed by CEOs and CROs and provides insights and recommendations for banks, supervisors, and fintechs on the best course to take in transforming the risk function.

The report first describes the key drivers that make change necessary and then lays out a longer-term vision, as well as shorter-term, more practical initiatives we observe at numerous institutions that are already having an impact by digitizing risk. It lays out the key elements a bank must develop for a digital risk transformation. Finally, it provides a transformation road map with concrete steps for shepherding a financial institution through a digital risk transformation program given the control specificities of risk and the function’s safeguarding mandate.

Keeping pace with change is always a challenge at first. We hope that this report helps to get banks fully prepared for the digital future that lies ahead. With the right risk strategies and an innovative mind-set, we are confident that banks can turn the challenges into opportunities.

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