The path to effective non-financial risk management – a roadmap for banks

Non-financial risk management (NFR) – more clarity, better decisions

Professional management of non-financial risks has long been more than just a compliance issue – it has become a strategic advantage. Those who recognize risks such as operational incidents, reputational damage or ESG violations at an early stage and manage them in a targeted manner create transparency, strengthen the trust of customers and regulators – and make better decisions.

Current developments make this particularly clear: cases of fraud involving deepfakes and synthetic identities are increasing rapidly – according to industry reports, such incidents have multiplied in the financial sector alone since 2023. As a result, banks are confronted with completely new types of risk that often overwhelm traditional control systems.

In practice, however, non-financial risk management often remains a patchwork of Excel lists, inconsistent assessments and a lack of links between risk types. What is missing is a systematic, integrated approach.

In this article, we show how banks can set up effective NFR management – and how our tool helps not only to document risks, but also to actively manage them.

Step 1: Risk inventory – creating a complete overview

The first step towards effective NFR management is the risk inventory. The aim is to ensure that all relevant risk types are systematically recorded and documented in a structured manner. This creates transparency and forms the basis for all further steps.

Step 2: Risk self-assessments – identifying risks across departments

The risk inventory is followed by a crucial step in NFR management: the identification and evaluation of risks by the specialist departments themselves – as part of so-called risk self-assessments (RSAs).

The process is initiated by risk management and carried out at least once a year. Each department systematically analyzes which risks could arise in its area of responsibility. Predefined event categories are used as a guide to help identify relevant sources of risk.

For each identified risk, an assessment is made of the probability of occurrence and the potential level of damage. This allows the loss potential to be calculated, which serves as the basis for further risk management. This decentralized approach ensures that risks are assessed where the know-how about processes and weak points is available.

Step 3: Loss database – learning from the past

Holistic NFR management not only takes into account future risks, but also loss events that have already occurred. Systematically recording and analysing such incidents is crucial in order to learn from the past, identify weaknesses and better assess future risks.

All relevant information about an incident is documented as part of the incident recording process – including the type of damage, the processes or departments affected, the cause and the financial impact. The standardised classification of cases is particularly important to enable comparable evaluations.

The loss database is more than just an archive, it is a strategic analysis tool: recurring patterns can be uncovered, control gaps identified and internal control systems improved in a targeted manner.

Step 4: Risk value and risk-bearing capacity – quantification by simulation

Once the individual risks have been identified and assessed, they are aggregated. The estimates of the probability of occurrence and potential amount of loss determined as part of the risk self-assessments are used as input variables.

These values are used in a Monte Carlo simulation to generate a loss distribution over a large number of random draws. The method makes it possible to map the combination and interaction of individual risks. The aim is to calculate an aggregated risk value that can be used as the basis for determining risk-bearing capacity.

Step 5: Action management and reporting – actively managing and visualising risks

Identifying and assessing risks is only the first step. It is crucial to derive specific measures from this and to consistently monitor their implementation. Effective NFR management therefore also requires systematic action tracking to ensure that recognised weaknesses are rectified and risks are actively reduced.

At the same time, reporting is becoming increasingly important. Internal committees, supervisory boards and external auditors expect transparent and comprehensible reporting on the risk situation, measures taken and developments over time. This requires consistent, up-to-date and addressee-orientated evaluations.

Smart app solution: our approach to integrated risk management

Modern NFR management requires more than just spreadsheets and email queries. It requires a systematic, digitally supported process that takes into account both the past and the future – and that makes risks comprehensively recordable, assessable and controllable.

Our tool, developed from many years of NFR project experience, accompanies banks along the entire NFR management roadmap and digitally maps key process steps. The structured implementation of the risk inventory and the development of target group-orientated reporting are supported by a tried-and-tested technical concept, which we provide together with the tool.

The tool itself provides a flexibly configurable form for risk self-assessments – including customisable scales for probability of occurrence and amount of damage as well as individually definable event categories. A central loss database is available for recording historical incidents, in which loss events can be systematically documented and analysed. A Monte Carlo simulation is provided in the tool for the quantitative aggregation of risks, which can be carried out on the basis of assumptions or data if desired. Risks can also be linked to measures whose processing status is monitored centrally in the tool.

This creates an end-to-end, digitally supported risk management process that can be implemented in a technically sound, methodically consistent and operationally efficient manner.