If you think relations between the U.S. and Russia are strained now, consider the 1980s. It was the culmination of the Cold War—an arms race between the U.S. and the USSR. Tensions were high, and there was one thing keeping everything in balance: mutually assured destruction, or MAD.
The basic premise was this: if the Soviets fired a missile at us, our early warning detection system would alert us, and we would fire missiles back at them. Both sides would likely take on heavy losses, which is why neither side wanted to fire that first shot. What preserved that tenuous peace during the era of nuclear proliferation was each nation’s detection system.
Early Warning Detection
As difficult as that period was, it provides useful guidance for financial institutions when it comes to how they can approach their enterprise risk management.
A financial institution today might consider its key risk indicators as the early warning detection system that identifies where it might run into some trouble down the road. This strategy is reactive, and is a key element of enterprise risk management that many financial institutions have in place already.
But is there a way to implement a proactive element into enterprise risk? I believe a return to the Cold War analogy can help us there as well.
Strategic Defense Initiative
The U.S. president at the time, Ronald Reagan, proposed a new, defensive strategy appropriately called the Strategic Defense Initiative that contributed to the end of the arms race. It meant that if the USSR fired a missile, we would destroy the missile with no mass human destruction to either party. It essentially nullified the effect of the USSR’s nuclear weapons race and threw off the balance of mutually assured destruction.
You can think of the Strategic Defense Initiative as a key performance indicator (KPI), or the capability of taking action against something before it makes an impact. This strategy is proactive and is a missing part of most financial institutions’ enterprise risk management.
So you don’t just monitor indicators for a figurative missile launch, but you also have measures for destroying the missile, like Reagan’s strategic defense initiative. That attitude changes the dynamic of your institution.
Dodging Missiles
As an example of how reactive and proactive enterprise risk management work to help maintain the balance at your institution, let’s say you’re considering a new product. Reactive enterprise risk management demands that you consider how this product affects other areas (or key risk indicators) in order to determine the potential impact of a new product. Proactive enterprise risk management demands that you have key performance indicators in place to identify specific goals and initiatives for mitigating or eliminating the risks revealed by your KRI.
So you don’t just monitor indicators for a figurative missile launch, but you also have measures for destroying the missile, like Reagan’s strategic defense initiative. That attitude changes the dynamics of your institution.
Many institutions don’t engage in proactive enterprise risk management, but are stuck in a reactionary regulatory arms race. Of course, no institution can eliminate all risk. But having an early warning detection system, such as having a set of key risk indicators, and its own strategic defense initiative, such as its key performance indicators, and today’s financial institution will be well-poised to face any figurative missile that may be launched in its direction.
Ken Agle, President of AdvisX, brings more than 25 years of experience covering almost all facets of financial institution risk management operations. He has conducted more than 350 compliance reviews and has assisted more than 200 financial institutions throughout the United States. He has developed and implemented systems and training programs on all phases of banking risk management, including, but not limited to BSA/AML, fair lending, loan review, HMDA, CRA, BSA, operational compliance, TILA, and RESPA. He has written numerous regulatory responses and appeals and has been instrumental in assisting institutions with challenging circumstances while facing regulatory enforcement orders. He has partnered with McGladrey & Pullen, RSMI, Promontory, Sheshunoff and other multi-region firms to provide support services to financial institutions. Mr. Agle specializes in strategic regulatory response and in developing and implementing both proactive and reactive tools and systems to preempt and resolve issues affecting today’s financial institution.
