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The risk management process involves identifying, evaluating, and controlling risks to a company’s resources and profits. These dangers can be caused by many things, such as monetary risk, legal obligations, technological problems, strategic management blunders, accidents, and natural calamities.
A practical risk management approach aids a business in taking into account all potential hazards. Risk management also examines the link involving threats and the potential adverse cascade effects on an organisation’s planned objectives.
Because it concentrates on predicting and comprehending risk across a business, this all-encompassing approach to risk management is occasionally called enterprise risk management. Enterprise risk management (ERM), in addition to concentrating on internal and external threats, highlights the need to manage positive risk. Positive risks are chances that, if taken, might boost a company’s worth or, alternatively, hurt it. Every risk management program’s goal is, in fact, to protect and enhance corporate value by taking calculated risks rather than completely eradicating all risks.
Probably never before has risk management been more crucial than it is right now. Because of the quickening speed of globalisation, the dangers that contemporary companies confront have gotten more complicated. The widespread usage of digital technology nowadays has led to the ongoing emergence of new threats. Environmental pollution or Climate Change has been labelled a “danger multiplier” by risk specialists.
Corporations and their governance bodies are reevaluating their risk management plans as the globe grapples with these crises. They are re-evaluating their exposure to risk and investigating the risk-taking process. The group that ought to be engaged in risk management is being re-evaluated.
The possibilities of a more proactive strategy to risk management are being considered by businesses that now employ a reactive strategy, protecting against prior hazards and altering processes when a new challenge causes harm. Supporting sustainability, resilience, and corporate agility is becoming increasingly popular. Businesses also investigate how advanced governance, risk, and compliance (GRC) systems and artificial intelligence technology may enhance risk management.
Risk management is a vital and quickly changing aspect of a bank’s operations. Risk management basically is calculating the likelihood that an adverse event will result from a specific course of action. It is also crucial in the world of business. A business can never expand or turn a profit if it doesn’t take risks.
Although they can change, the risks that banks typically manage are:
However, banks are subject to risks coming from external circumstances over which they have no direct influence, including such global warming risks.
Banks manage risks for a variety of reasons, including:
Nonetheless, seeing as banks and the financial system are so crucial to both the domestic and global economies, inadequate risk management has far-reaching effects. This was made clear during the financial crisis of 2007–2008, when authorities had to band together to rescue banks.
Because a bank’s operation revolves around the generation of money, it may limit or even halt lending if it runs into problems, even on a relatively small scale. This impacts how readily available money is to businesses and inhibits economic growth.
For this reason, both domestically and globally, financial organisations and banks are controlled.
Typically, cryptocurrency enthusiasts are impatient to start trading and generating money and neglect to think about the size of their portfolios or how to handle their money. New traders frequently risk in search of a big win while paying little attention to strategies that promote sustainability. If you recognise yourself in that description, it is worth looking at specific risk management techniques that, when properly implemented, can safeguard you and allow you to continue in the industry without emptying your savings.
There can be no question that bad things will happen to you when trading cryptocurrencies. Terrible experiences include trades that result in the opposite of what you wanted, odd price surges, errors, and numerous other undesirable occurrences. Each trader who deals in cryptocurrencies does so at some level of risk. Since they frequently leverage, cryptocurrency futures traders tend to assume more risks. Your trading balance is impacted, and you might lose all of your cash, if proper risk management procedures are not followed.
Risk management strategies record how you intend to control your threat when investing. They safeguard you against the negatives of your transactions and maintain you in command of your expenses. When the proper crypto trading techniques are already in place, the guidelines will keep you safe and assist you in getting the desired outcome.
Risk management is crucial for successful trading. Therefore, new and struggling traders should take it seriously. Despite how basic they may appear, failing to implement them might cause you to experience trading difficulties.
Banks are involved in risk management. Regulators appear to ignore this in their efforts to severely curtail the banking sector’s activities related to cryptocurrencies, acting instead on the presumption that “any risk is a bad risk.” It is true that the cryptocurrency market has gone through a very difficult period and that some banks have been hurt. Yet, according to two experts, authorities should ensure that banks take the proper risks.
They claim that the current approach may lead to an increase in risk over time.
The Comptroller’s Office, the Federal Reserve, and the Federal Deposit Insurance Corp. released a succinct public declaration in the first few days of 2023 outlining dangers to banks resulting from activity connected to crypto-assets.
The declaration reassures readers that financial institutions “are neither forbidden nor discouraged from providing banking services to consumers of any specified class or kind, as authorised by law or regulation,” as is customary these times for authorities.
Nevertheless, the regulatory authorities mention that they remain in the process of evaluating “whether and how” virtual currency operations can be carried out in accordance with “safety and soundness, consumer protection, legal permissibility, and compliance with applicable laws and regulations,” which is only further supported by more current behaviour by the Federal Reserve.
By dumping any links with companies that deal with cryptocurrencies, regulators require banks to “de-risk”, according to those who are keeping an eye on the changing attitudes and behaviours towards cryptocurrency.
In “Operation Chokepoint,” an intra-agency initiative orchestrated by the Justice Department with help from federal bank authorities, we have witnessed this scenario.
The objective is to stress financial institutions to break off relationships with accepted but unfavourable companies that are thought to increase the risk of fraud and money laundering. The advertising received harsh criticism and was ultimately condemned even by the authorities. Nonetheless, the overall result was to steer respected companies into less trustworthy and open firms that provided financial services.
In the aftermath of the cryptocurrency disasters we saw in 2022, the temptation to circle the financial sector is reasonable, but it is ill-advised. In the near term, retaining innovative, complex technology beyond the governmental purview could feel more secure. Yet over time, then that will increase the danger.
The modern monetary companies that securely store and transmit money and other valuables primarily depend on banks and other regulated financial entities. The technology employed to do specific tasks has significantly advanced from previous times. This will carry on. Thus, reputable, controlled financial institutions must be able to respond to new risks of all kinds and keep supporting the economy.
It is nonetheless far too premature to predict if cryptocurrency will fulfil its aspirations or whether conventional cards and other payment systems or other platforms, will out-innovate cryptocurrency channels, reports from the “crypto winter” aside. Authorities and other federal authorities, however, must avoid prejudging the results. Furthermore, they shouldn’t limit banks’ ability to compete by limiting them to a select few crypto-related markets.
Banks are knowledgeable actors that have experience running banking systems and managing risks. Do we genuinely desire to exclude all crypto transactions from a sector that possesses the knowledge and responsibility necessary to learn how to perform these things correctly?
Authorities who prevent banking institutions from experimenting safely will limit their contributions, raising the possibility that the system will become divided and financial institutions will be unable to participate in what may turn out to be a crucial component of the current global financial architecture.
Ring-fencing banks from cryptocurrency are not only unneeded, but it is also foolish. Banks are in the business of taking risks, even if these risks might occasionally have very negative consequences. Think about the past as well as the present:
Regulatory authorities are not really advocating for banking institutions to be isolated from those operations, though. They anticipate that they will be vigilant in controlling risks.
We must admit that the cryptocurrency failures of last year actually managed to have a negative effect on a limited number of institutions. Legislators are likely to consider those occurrences as supporting their strategy. In fact, authorities have already noted previous difficulties at certain banks with a focus on cryptocurrencies as proof that such operations present risks that may be impossible to handle wisely.
Without discussing the details, we believe that these instances have less to do with cryptocurrencies as technology and more to do with managing traditional banking risks (such as concentrations and liquidity problems).
Unsafe risk concentration has already been an ongoing challenge for the banking industry. It’s also essential to comprehend and continuously monitor structural threats. These problems are complex and not exclusive to cryptocurrencies.
Regulatory authorities should really not concentrate on mitigating risk while supervising cryptocurrency and banks’ engagement in it, as they ought not to in any of these other sectors. Making ensuring banks take suitable risks ought to constitute the goal.
“Appropriate risks” might mean many different things. We interpret this to suggest that individuals should not even incur dangers they do not fully grasp or cannot measure. They cannot handle those risks by necessity.
For the remaining risks, the emphasis should be on limiting excessive risk-taking compared with the strength of a particular institution or the soundness of the financial sector in its entirety.
Authorities now appear to emphasise that any danger is a risky investment related to crypto-related operations. The most recent intergovernmental advisory is merely the most current in several authorities’ moves indicating banks should avoid cryptocurrency. They consist of:
As 2023 approaches, authorities must be more explicit about the practices that banking institutions can participate in connected to cryptocurrencies and how they can manage the risks. Authorities “simply saying no” to everything related to cryptocurrencies won’t assist banks, the banking industry, or financial stability, as Federal Reserve Board Governor Michelle Bowman acknowledged in a speech. The business requires a balance between what is worthwhile and what doing it “well” actually looks like to accomplish this properly.
Most cryptocurrencies are convertible digital currencies, as defined by the Internal Revenue Service (IRS). They can therefore be used in place of real money and serve as a trading instrument, a reserve of worth, an account denomination, and a valuation unit.
Additionally, it implies that any earnings or revenue derived from your cryptocurrencies are taxed. But, there is a lot to understand about how virtual currency is taxed because, depending on the circumstances, you might or might not owe taxes.
Knowing when you will be taxed is crucial when you possess or use cryptocurrencies so that you are not taken aback when the IRS arrives to collect your taxes.
Some points to ponder on this subject are the following:
You do not need to pay taxes to own a cryptocurrency; they are tax-free on their own. For taxation reasons, the IRS views cryptocurrency as ownership, which implies:
All the above information is general, but let us take Texas as a specific case.
The Texas legislature just needs to meet in odd-numbered years, so the political representatives really have to take immediate action before the potential to take the initiative is lost.
A proposed bill before the Texas legislature calls for “a master plan for the expansion of the blockchain industry,” which could turn the state into the nation’s cryptocurrency capital by having to introduce tax-free purchasing with bitcoin, amongst many other proposed changes.
Notwithstanding the bill’s uninspired label, it has innovative and intriguing concepts for virtual currencies. The legislature might come up with something slightly more catchy the next time around than “Relating to the founding of a workgroup on blockchain concerns concerning this state.”
Putting aside the jargon of the government, Carla Reyes, an assistant professor of law at SMU Dedman School of Law, presided over the working group and produced some insightful ideas. The study, which offered innovative and exciting suggestions for digital assets, was delivered to the legislature in November.
Texas residents will reap the rewards of a state setting the pace in the blockchain and cryptocurrency industries if the suggestions are implemented during this legislative session. The elected officials must act fast to seize the initiative before it is lost because the Texas legislature only meets in odd-numbered years.
A two-year retail sales tax break would be granted for bitcoin purchases received at the point of sale. Everyone likes to save money when they purchase, so this would encourage both customers and retailers to look into digital currencies and set up the appropriate equipment.
Texas businesses that are planning strategically are advancing right now rather than waiting to potentially save money on sales taxes. Since August 2022, the NFL football franchise Houston Texans has accepted cryptocurrencies such as Bitcoin and others as payment for single-game box suites. The Texans are collaborating with a digital banking partner so that they may instantly convert cryptocurrency payments into dollars, but they are not immediately hanging this onto digital assets.
Perhaps businesses would be encouraged to keep onto the bitcoin and use it for their product specifications if Texas did implement the sales tax holiday. This could be the impetus cryptocurrency requires to take off and become a widely used payment method.
The group of experts advocated allowing the state of Texas to make direct bitcoin investments to continue the concept of incorporating bitcoin with the state’s payment activities.
Innovatively allowing Texas to retain bitcoin on its balance sheet and using that bitcoin for payments would probably continue to encourage the growth of the state’s virtual currency infrastructures.
In 2022, three sponsored Ant Miner S9 bitcoin mining rigs were given to the City of Fort Worth Information Technology Department, and the city launched a pilot program. The three machines were upgraded over the year by more potent and energy-efficient Ant Miner S19 units as the effort became significant enough. Carlo Capua, the city’s director of strategy and development, suggested that mining operations continue at the municipal level. Capua did point out that the program was a chance to learn more about the implications and prospects of mining rather than an opportunity for day trading or investing in bitcoin. Due to their endeavour, the working group may have learned more about the possible benefits of bitcoin mining and the energy industry.
The suggestions have included a tax break on natural gas that has historically been flared and will be utilised to mine bitcoins as well as a tax break on the sale of energy to significant flexible demands like bitcoin miners.
This win-win proposed solution keeps changing the tax benefits from flaring gas to consuming gas when that gas may be utilised on-site and, therefore, will introduce employment and economic activity to country areas of Texas. The severance tax exemption claims to support an ecologically responsible transformation from flaring gas to using gas on-site in a generation system.
Electricity government subsidies are meant to be a component of the plan for building a robust and resilient system. The suggestion is for the miners to cooperate with ERCOT, which manages the electrical grid in Texas, using a manageable or easily countered load methodology.
The Texas Work Group additionally suggested creating a manpower programme that will also help students learn technical knowledge of connectivity, hardware, software, electronic systems, and heating and cooling requirements to equip them to contribute to the expanding bitcoin mining environment.
Texas State Technical College has adopted the workforce program, which plans to have its first genesis class in Q1 2023. The University of Texas A&M has also stepped up to offer a course called “The Bitcoin Protocol” in its 2023 spring semester, focusing more on programming than mining.
Texas is establishing a precedent in the market for digital assets and has no plans to back down. The state’s population will significantly benefit from the sector’s accelerated advancement due to its wide-ranging effects.
It is important to congratulate the tireless contributions of Senator Angela Paxton, Senator Tan Parker, and Congressman Giovanni Capriglione in passing House Bill 1576 and forming a Study Group to figure out how Texas can lead in this regard. As they attempt to get every one of the twenty-five proposals accepted during the current Texas legislature session, Texans and the rest of the world will be monitoring.
Maintaining the cutting edge of technology requires knowledge and abilities beyond the technology teams. It helps to have participants from different business lines participate in the development process, as well as those who left banks for fintech and wish to return. A good question to ask yourself: is your transformation journey hindered by an approach focused solely on technology?
Today’s banking sector demands agile development of innovative financial products as well as advances in concept and design. According to a Bank of America executive, the fact that “rapid agile” is giving way to “hyper agile” in the planning process at the megabanks, is a sign of the growing urgency.
The change can be seen in how these banks are increasingly taking the lead in the development process in novel ways, with lines of business playing a more critical role than in the past, to reduce the time it takes from identifying a market need to meeting it.
For instance, at Bank of America (BofA), innovation and development projects have been pushed way down to different business organisations, with employees from different functions joining the pool of potential developers.
At JP Morgan Chase, Roman Eisenberg, managing director and the company’s head of technology for digital banking, mentioned that “controlled autonomy” is the bank’s development mantra. With this strategy, lines of business can independently develop their own technologies and fast bring them to market.
Hari Gopalkrishnan, current managing director and head of retail, preferred, small business, and wealth technology at Bank of America believes that a “hyper agile” transformation approach will be the norm of banking in the near future. In this state, he mentioned that anybody in the company could initiate and work on an idea, be able to propose it, test a proof of concept, and integrate that into a business roadmap.
According to Nick Nadgauda, managing director and Global Head of Technology for Citibank’s Treasury and Trade Solutions, the evolving perspective on how and where technological progress should emerge corresponds to the nature of the banking industry itself. He claims that giant financial institutions are highly regulated powerhouses. Given this, they have a closer relationship with nonbank businesses thanks to embedded banking and other new technologies. Offering payment services for a ride-sharing or food delivery app may also involve managing the payment for the gig workers who deliver or drive.
Nick Nadgauda highlighted that this is the seeding point on where the banking industry’s growth was rooted in the past few years, pointing out that it heavily contributes to the pressure banks experience to match the development speed that fintech can provide.
Last December 2022, the three bank executives (Citibank, Bank of America, and JPMorgan Chase) participated in the Tearsheet’s end-of-the-year celebration called The Big Bank Theory Conference. This conference highlighted the exploration of the changing face of the financial institution by bringing the industry’s top decision and opinion-makers to one virtual space. This is where the leading banks, credit unions, challenger banks, and payment firms come to wrap up the past year and get inspired and educated toward the coming year.
During the Big Bank Theory Conference, Roman Eisenberg from JPMorgan Chase spoke extensively on its mobile and web applications, which are utilised by more than 60 million customers, and how there were 20 million to 35 million active sessions each day. According to Eisenberg, this includes an “ecosystem” comprising more than 100 items and services, all of which must be able to cooperate. He mentioned that the company’s objective is to provide its consumers with accessible, quick, secure, always-available experiences that fit in the palm of their hands from a complex and risk-averse ecosystem.
Eisenberg highlighted that the company assesses its technological processes in how the consumers utilise them rather than how the company is organised. He mentioned that the ultimate guiding principle that JPMorgan Chase follows for technological advancement is to focus that business on its products.
Usually, the IT department has been a major roadblock for business units trying to launch a new product or thwart a competitor’s strategy. However, this trend dates back decades.
Eisenberg claims that his department’s digital technology unit is aware of the need to avoid becoming a “bottleneck,” as he puts it, that delays necessary reform.
He says that with “controlled autonomy”, the company’s technological mantra, office staff can initiate innovations independently. They do not have to wait for any actions from the digital technology team to do things and move into action. This is necessary due to the demand and pressure to innovate processes and change banking procedures.
“Controlled autonomy” refers to the ability of lines of business to create and deploy new functions and services tailored to their niche markets that integrate with Chase’s whole IT infrastructure. It is a mindset that enables the units to independently launch the most recent iterations of these technologies.
However, setting up technological requirements to be met is necessary to make that happen without producing disruption.
According to Eisenberg, the standards contain a testing approach to ensure the new procedures and services function properly. This expedites the release of software without sacrificing its quality or availability.
To understand the challenge, consider that Chase has 400 engineers for consumer banking products alone, many working independently, across 95 teams. Eisenberg highlighted that this is how the bank can update and add to its mobile capabilities every two weeks, enabling process continuity.
It takes much experimenting, frequently with live experiments, to make new ideas work. According to Eisenberg, these are constructed, employing practices like A/B tests, to give concepts a respectable live tryout. These studies allow the company to swiftly identify ineffective features and roll them back, he added.
According to Bank of America’s Hari Gopalkrishnan, the concept of “omnichannel” must be redefined. Today, it has come to mean that, depending on the consumer’s needs, a transaction initiated in one channel, such as online banking, can be easily resumed later whether online or in a branch. Gopalkrishnan believes this is out of date. Customers are no longer drawn to branches as frequently as they formerly were by online functionality friction. Processes can therefore be managed entirely digitally or in a hybrid way.
He mentioned that although consumers could view human interaction as the default option, there is no reason why it can’t be seamless. Because of this, “Erica”, Bank of America’s natural language chatbot, was made to enable the entry of a human agent into a transaction when necessary, but also to enable the return of the consumer to the chatbot dialogue following their intervention. This is comparable to having a live supervisor step in to answer a call centre employee’s query before leaving to let the employee continue speaking with the customer.
Gopalkrishnan claims that Erica is advancing beyond routine banking to help clients with more challenging activities, such as responding to inquiries about things like individual retirement accounts.
He highlighted that every BofA department now has a role in digital transformation. More broadly, seeking out innovation inputs across the company has become increasingly important in developing this capability and the other technological advancements he described.
In Gopalkrishnan’s own words: “We don’t have a set of people sitting in an office in Palo Alto who are the smart people who come up with all the ideas and then tell everybody else what to do.”
He added that BofA holds many patents on concepts rooted outside its technical departments. He claims that the bank conducts “sprint cycles” every quarter, involving up to 1,500 employees globally. In this program, each team has 48 hours to develop an idea and a vote session determines which of the more than 100 addressed have the greatest promise for viability and return on investment.
BofA understood that having technologists alone poses the risk of leaving out crucial components of the process under review, thus participation was expanded. Gopalkrishnan believes that commercialising an idea means including everybody else.
Many financial institutions, both large and small, have found that fintech alliances are essential to their efforts at innovation. Previously, innovation groups inside Citibank’s divisions were responsible for identifying collaboration possibilities and locating the best companies to engage with.
However, as highlighted by Nadgauda, Fintech collaborations lack many breadths, although they have worked to a certain extent.
As a result, Citibank ensures that these initiatives will involve employees from relevant business lines. This process allows the company to produce more innovative ideas and increase exposure to more new partners.
Producing cross-pollination is another concern that most Fintech companies face challenges. Nadgauda claims that many former workers of Citiank are starting to return to the company after being let off from the fintech employment they had previously departed for.
“They’re saying, ‘It looked good. I took a chance. It didn’t work out. Can I come back?’” says Nadgauda. He mentioned that this has been happening for many of their employees and that the company created a special program branding them “returners”.
Nadgauda believes that for many reasons, returning employees from fintech companies are beneficial to the company. “You get people who know the institution, but they now have a little bit of a different perspective and they can bring that perspective with them when they come back”, he added.
