Significant Improvements in Risk Management Through Digitization

The process of effective risk management is associated with significant improvisation in certain parametric factors on which the financial, operational and managerial risk of commercial banks are dependent upon. Among them digitization plays a key role. It efficiently channelizes the necessary services of the bank by incorporating quality transfer of information and bringing improvement in the banking activities that requires risk management endeavors (Pavlyushchenko, 2017).

The Keystone National Bank initially continued its business as the Keystone Bank of Philadelphia after which it was converted into the form of a national association by July 30, 1875. The examination if its financial statement revealed that the bank was suffering from sustained losses due to the reason of its mismanagement of finds and bad impairment of its capital. Assessment of the stocks were essential to restore the impairment (Spagnoletti et al., 2019). However, the response from the stockholders was not up to the mark. The bank examiners drew the attention of the Comptroller of Currency where it was been found that the financial health of the bank was not in a healthier condition after examination of the notes, collaterals and other securities (Laamanen et al., 2015). There were excess overdrafts which were not added in the liability section of the balance sheet and credit risks were involved as a number of loans were there and repayment were not on time to balance them. Stockholders involvement were necessary to raise sufficient funds along with paying the depositors, other creditors and for meeting the objective of restoring the solvency of the bank (Llorente, 2016).

The transformational shift from offline information exchange system towards that of digitalized platform is an important venture in the banking industry. With the advent of new technology and its efficient synchronization with electronic platforms has led towards maximization of customer satisfaction, better employee experience, higher revenue earning and cost minimization (Hand, 2016). This has reduced the proportion of labor associated with information storage as well as mitigated the risks associated with information exchange. Better monitoring and efficient control mechanism are found to prevail after incorporation of digitalized platforms in the banking sector which simultaneously raised the overall business value by implementing structural development through digitization (Eaton et al., 2014).

Digital Risk in Keystone National Bank

Digital risk circumscribes all sort of digital enablement that triggers the improvement in mitigating risk and enhancing efficiency of banking activities regarding decision automation, process automation, early warnings, etc. and incorporates advanced analytics through artificial intelligence, machine learning, robotics, etc. Basically, digital risk is inclusive of all necessary adjustments in process formulation, optical character recognition, data gathering with analytics and IT that boost the overall organizational set up coupled with talent and organizational culture into an advanced level where the functional aspects of the bank in terms of its operational, managerial, financial segments are monitored more appropriately and at a faster rate (Duhamel et al., 2018).  To ensure a rational and efficient process flow in Keystone National Bank, it is necessary to redesign the operational structure of data analytics and IT architecture with electronic platforms that supports digitalized risk management. Advancement in the operating model and upgrading its requisite capabilities will drive towards rapid digitization.  Hence, basically the risk associated with the bank is to process its information and exchange them through secured digitalized platforms so that they can avoid breaching of confidential information and along with that the bank should become capable of channelizing the financial and non –financial banking activities with credibility and at faster pace. The robust practice of innovation coupled with the advent of new technological domains will nurture the regulatory environment of digitization by enabling rapid conversion of data into bits that gets channelize in the form of processed information in the Keystone National Bank.

Process of Effective Risk Management

 Modular approaches to target areas can be beneficial for digitalizing risk functions though it will be relatively at a slower pace (Barroca et al., 2017). However, to reach a state of sustainable advancement and significant transformation it is important to enhance the efficiency of the digitalized platforms through fixing the bugs and errors in risk. Robust controls should be necessarily applied followed by test and learn pilots in major part of the Keystone National Bank. In fact this approach will be effective in monitoring the early-warning system as well as the commercial credit risk of the bank.

To ensure current risk management, efficient digitization initiatives is necessary to be implemented to reduce operation cost for risky activities.  Banks like Keystone National Bank is facing compliance risk activities due to inefficient resource mobilization and limitations to optimize the allocated activities which can be overcome in global, multinational and regional sphere by implementation of digitization with managerial effectiveness (Khan, 2016). The potential benefits that will be obtained through digitization and efficient risk management initiative includes productivity gains, revenue generation, and enhancement in efficiency along with risk mitigation. The major risks in the banks can be categorized as credit risk, operational risk, compliance risk, market risk and liquidity risk.

Credit Risk

The deliverance of credit gets hampered due to manual processes of underwriting, data collection, documentation, etc. and along with that these data issues impacts negatively to the overall banks performance as slow cycle times hinders customer experience. To alleviate these pain points digitization of credit risk management utilizes the process of connectivity, data automation, digitalized delivery and decision making (Elsinger et al., 2018). In Keystone National Bank, these will enhance the value by securing revenue, reducing operational cost and bringing improvement in the process of risk assessment.

Operational Risk

The aspect of operational risk is comprised of the initiatives taken under consideration by the bank to channelize all of its activities in an optimal manner. The strategies and policies adopted to establish better pricing of financial goods and services followed by maximizing the sales and optimizing the decision making process and the crucial part of financial planning that involves extensive operational risk. Issue identification regarding contracts and documents along with application and restructuring of the work flow support (Joshi & Parihar, 2017).

Compliance Risk

The process of internal control and compliance enables the banks to render assurance regarding achievement of the objectives of the organization. This comprises of efficiency in operational management and logistics, credibility in financial transaction as well as financial reporting and finally the applicability of appropriate laws, protocols, regulatory policies and effective internal monitoring. The major risk involves with the human error where the probability of the error is defined as the frequency of the outcomes. The direction of risk should be identified through the compliance system and the risk appetite should be within the management tolerance level so that it can be stabilized through maintaining adequate controlling mechanism.

Digital Risk in Keystone National Bank

Market Risk

Market risk gets created due to competition into the market and fluctuation in target customer preferences which changes overtime and cannot be controlled directly followed by existence of asymmetric information into within the market. Decentralizing the investments in the market and diversifying the products and services of the bank within various target consumers. Systematic risk in the market is the minimal level of risk that attributes to those factors that are external to the market portfolio. On the other hand, non-systematic risk is that component of risk that can get mitigated by diversification. Hence, market risk is basically the loss incurred by a bank due to changes in the market attributes. It renders its impact upon the earnings and capital of the bank due to changes in the level of interest, price of securities, commodities, equities, foreign exchange as well as existing volatilities in the market prices.  

Liquidity Risk

The aspect of liquidity risk is concerned with the ability of the funds in terms of its assets to meet up with the payment obligations with fully efficiency and economic viability. It is essential for Keystone National Bank to utilize digitization and ensure that the bank possess potential ability to cover up the liabilities within the due date. Hence, liquidity risk arises due to incongruity in maturity pattern of liabilities and assets (Henningsson & Hedman, 2014). Liquidity risk enables the inability to generate cash for coping up with the increase in the assets or decline in the deposits. In order to manage this risk due to liquidity it is important to resort the borrowings from the central bank as well as monitor the safety issues related to liquidity and avoid unprofitable sales of the assets followed by lowering the default risk premium.

Conclusion

Digitization ensures inter connection within the people and bank from all possible aspects regarding financial transactions. It not only enables the opportunity to simultaneously extract information related to customer information and their financial transaction but also accelerate the ability of the bank to fulfil the consumer need at a faster rate. Conclusion can be drawn regarding Keystone National Bank where through digitization the bank can create new revolutionized business models that possess operational efficiency and managerial effectiveness in terms of its financial services and customer satisfaction. Digitization can ensure in case of Keystone National Bank that customer have autonomous privilege to access information regarding their financial services undergone with the bank which will build their trust on the bank and also will smoothen the business activities in the long run.

References

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