Financial Institutions

7 Crucial Issues Facing the Finance Sector

Reputational and Credit Risks are keen in banking, but those are not the only risks bedeviling the sector.
By: | June 22, 2018 • 4 min read

From a reputational perspective, the financial sector may have risk management needs that are more pressing than those in any other sector. At Wells Fargo, employee incentives and actions appear to have been diametrically opposed to the best interests of customers. That bank has paid millions in fines and settlement agreements with customers. For a populace still smarting from the financial crisis of 2008, the actions of Wells Fargo aren’t helping the reputations of banks.

Banks must also contend with political volatility that could lead to dire consequences for lenders. Political turmoil in Italy, the European Union’s largest debtor nation, has already sent shock waves through markets and could end up doing much worse. Italy, the third largest economy in Europe, has $2.5 trillion in debt outstanding, according to the Economist. These credit and reputation risks take a prominent place in our list of 7 crucial issues that are facing the financial services sector.

1) Failure to Engage Customers

Investors who put money into a CD or a savings account expect a return in the form of accrued interest.


But it’s been a long time since money market accounts and certificates of deposit offered anywhere near the return that they did prior to 2008. As the Fed continues to raise interest rates, thoughtful investors have to be asking themselves why their bank isn’t offering them a better rate of return. This raises the risk that investors will increasingly choose other investment options, including online banking, over depositing in brick-and-mortar savings and loan institutions.

2) The Human Element of Cyber Risk

Efforts are underway to do more to make bank employees a more vital part of bank cyber defenses. Breaking down silos between human resources, the chief information security officer, the CFO and operations management will be key to create a more coordinated effort to better train bank employees in detecting phishing and spear-phishing scams.

Optimists say banking employees are naturally compliance-oriented and will do well at this sort of training. Others worry that cyber criminals continue to find new ways to innovate and will always stay one step ahead of the corporate sector.

3) Operational Risk

Operational risk is the risk that can turn into a reputational risk for a financial institution in the span of one news cycle.

Any breakdown in internal processes, whether it be compliance, risk management’s oversight of trades and investing, or the failure of a bank’s investment models falls under this umbrella. In recent months there has been a consistent message emanating from the banking industry that it cannot find enough risk management talent. Some news stories say the shortage is so severe that banks are running a rising risk of compliance failures.

4) Technology Risk

As we see in the commercial insurance business, mergers and acquisitions can result in the combination or inheritance of outdated information technology systems.

The cost of getting legacy technology systems from different organizations to function together can be prohibitive. A lack of coordinated information technology systems can create a host of worries, including the fact that a cyber attack could go undetected for months due to poor management visibility into information technology functions.

5) Reputational Risk

Hundreds of thousands of false accounts created for customers, selling people unnecessary car insurance and on and on. Skeptics and critics wondered whether executives at Wells Fargo should not simply lose their jobs and their bonuses but also be sent to jail instead. Banking has a bad case of the reputational-risk flu and continued outsized salaries and bonuses for bank executives, coupled with meager interest rates being offered to depositors don’t promise an effective or timely cure.


6) Credit and Investment Risk

Yes, it’s an interconnected global economy and 2008 taught us how a risk management failure in one part of the economy (in that case, poor decision-making around investing in collateralized debt obligations) can lead to global economic turmoil.

History does repeat itself, but there are indications that the next trigger that results in credit losses may come from political instability. It could be political developments in Italy, the largest debtor nation in Europe, or it could be conflict in the Middle East.

Either way, whether banks have sufficiently girded themselves against these risks won’t be known until the waters of turmoil recede.

7) Regulatory Pressure Forces Talent Out

“Traditional” banking is subject to so much regulation that the pressure to comply with it may force financial services talent out of an established institution toward, for example, a fintech start-up.

Take this risk in conjunction with the above risk that banks are failing to engage customers and it doesn’t take too much effort to imagine droves of customers and employees deserting banks in coming years. &

Sources include The Economist, Willis Towers Watson and CFC Underwriters.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.


But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.


Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &


Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]