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7 Tips on Building a Financial Risk Management System for Lenders

Jun 22, 2021 MicroBilt News

7 Tips on Building a Financial Risk Management System for Lenders

The world of finance can include tax codes. The word tax comes from the Latin word taxo which means I estimate. 

If you're a company, then you might wonder about building a financial risk management system. While it might seem tough, there's hope.

This article will go over the top tips for building an effective financial risk management system. Read on to explore these tips and get your financial risk management system built today. 

Why Have a Financial Risk Management System? 

Total consumer debt in the U.S. is $4.163 trillion, don't let your business be part of this statistic.  Having a risk management strategy will protect you from the unexpected. Your business professionals will create a financial business strategy in order to keep the business profitable.

They'll also manage any financial pitfalls that can lead to disaster. This can include avoiding paying too much on manpower/materials for business projects, questionable business investments, and projects that aren't cost-effective. 

It can also help your business with maintaining competitiveness within the marketplace. It also helps your business with continual growth despite potential risks. Along with this, you'll want to map out and identify your priorities for your business. 

More Satisfied Customers

Not only can you remain compliant with FCRA (Fair Credit Reporting Act), but you can also have more satisfied customers as well. When your business performs more effectively, it'll lead to better customer service. 

Identify Problems

Having a financial risk management system will help you explore any inefficiencies, and ways to deal with or avoid different risks. These risks can cause damaging effects to your company's finances. When you resolve issues, it can improve your company's bottom line. 

Having a Productive Risk Management Process

First, identify what's causing the risk and what it is. Determine what amount of risk you're willing to retain, and how to handle any risk not retained. 

In the identification process, you're understanding what your risks are within your business. You're also deciding what steps your business will take to protect yourself against threats. 

The next step is protection. This is where security controls are put into place. Your staff needs to be trained and aware of different protective measures. 

After protection, you'll need to have a step for detection. This is what you use to protect against identity theft

Decide what techniques your company uses to respond to threats. How will your company decrease the impact if something does happen? 

After the response step, your company needs to have an effective strategy for recovery. Determine how your business will get back on track, and make the improvements necessary. 

1. Create a Hedging Policy

First, define all limits, rules, and boundaries before hiring new talent. A hedging policy needs to have an exception approval process, max hedging tenor limit, how often portfolio stress testing occurs, and how often there are risk meetings. 

2. Have a Risk Committee

You'll want a risk committee who will meet and discuss portfolio concentrations, any changes in market conditions, stress testing, results, and positions. It needs to include those from the treasury, commercial, trading, control, and credit functions. 

3. Define Business Objectives

Have effective business objectives and strategies in mind. Avoid using frameworks alone since they don't address risk. Make sure that you take extra steps to integrate risk during the planning stages. 

4. Hire Effective Talent

Find the right talent to handle your common business risks. Hiring new talent can bring new ideas and procedures to your business. Keep your top talent and hire new employees in order to stay on top of an effective program. 

5. Recurring Review

When you have a team or policy in place, you'll want to establish periodic meetings. These meetings will go over different proposals, policies, market data, exposures, and exceptions.

It'll ensure that everyone is on the same page. It's a good idea to have these meetings every week since that's the industry standard. 

6. Perform Stress Testing

Use stress testing (different financial scenarios) with your employees to educate them. Determine how often these stress tests will occur, and stick with this frequency. Use the stress test results in your weekly risk management meetings. 

7. Have Inspections

Whether you have onsite or online inspections, it's beneficial to have an independent financial company review your company, and take a look at the different risks. They can also help you create benchmarks. This can help you with identifying and improving existing company practices. 

The Consumer Financial Protection Bureau (CFPB) and the Federal Fair Credit Reporting Act (FCRA) require you to have certain practices and knowledge when it comes to consumer data. Ensure that your company is compliant in order to avoid fees or penalties from these organizations. 

You can choose from FCRA training, inspections, and credentialing. You can make sure that all of your employees comply with the requirements of the FCRA. Save effort and time by having an independent inspection in order to ensure that your business meets the requirements for data access.

Ensuring that your employees and business have the proper credentials is important as well. You'll also want to make sure that you have the correct supporting documents to prove this. This can include application data verification, document verification, and site inspection. 

Tips on Building a Financial Risk Management System

Now that you've explored these tips on building a financial risk management system, you should have a better idea of what you can do to prepare. Are you ready to make sure that you're FCRA compliant? 

Or, maybe you're looking for identity theft or fraud protection? Contact us today, and we'll come up with an action plan that meets the needs of your business. Protect your business today, and have an effective risk management system in place.