Banks love to take risks, or not?

The common opinion seems to be that banks are largely occupied by avoiding risks. That may be true to some extent. In reality banks (as well as insurance companies) are actually in the business of taking risks. And scary risks as well, for that matter.

Think about it. You hand over a sum of money to a person that is equivalent to two or more years of his or her salary. And then you hope to be paid back in 20 or 30 years into the future. All of that for a few percent of ROI. Sounds scary to me, but is exactly what the mortgage business is about.

And that is just one example.

How to manage?

How does a bank manage to take these risks?

If you dive deeper into the operation of a financial services company you see a great divide. On the one hand there are business units who are pressed into finding new opportunities for making money, and are potentially willing to take huge risks for that. On the other hand, there is the banks’ risk management, which tries to control that risk. They listen to this saying from the aviation industry: “There are old pilots and bold pilots, but no old, bold pilots.

This tension between risk and reward is good and without the two of them the company would not survive very long.

But problems creep up if one of them gets the upper hand. As an example, one former bank compliance officer I interviewed recently told me their bank had no less than three risk committees, and they often opposed each others findings.

In that climate, little innovation is possible. In the long run, that is not going to be healthy for the company.

A lot of financial services companies are stuck in their acceptance of cloud computing. Plenty initiatives float around on the one hand, few get accepted on the other hand.

Root cause

Companies differ in how this stagnation comes about, but I see a common root cause.

Often there is a lack of a common understanding of what cloud computing is about, and what its most relevant risks are. As a result of this, innovation and growth opportunities are limited by true understanding of cloud risk management.

Financial services companies that do not resolve this conflict, will never get their move to the cloud off the ground.

I am writing an ebook on the drivers and barriers to cloud adoption in the financial industry. If you work in the industry, and want to compare notes on specific points, drop me a line. I’d love to talk.