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GRC vs. ERM vs. IRM: Understanding Risk Management Frameworks

6 min read
May 22, 2024

Risk management methodologies have an acronym problem: there’s a lot of them and it’s not always clear what they mean. While academics and consultants debate the merits of GRC vs. ERM vs. IRM, it’s not always clear how these frameworks translate into functional risk management tools for financial institutions.  

Many wonder: Is there anything wrong with basic, old-fashioned risk management? After all, risk management is about identifying risks and implementing the proper controls to mitigate them. Do methodologies matter if the job gets done? 

The answer is that, yes, they do. Choosing the right risk management framework matters, particularly for a financial institution’s strategic decision-making and business outcomes. 

In this blog, we’ll explore different risk management methodologies to understand how they are used by financial institutions to both manage risk and seize strategic opportunities. Let’s start with some definitions.

Defining the risk management frameworks

Financial institutions rely on a variety of risk management frameworks. These include: 

Risk management. Risk management is the systematic process of identifying, assessing, and mitigating threats or uncertainties that can affect a financial institution. This includes analyzing risk likelihood and impact, developing risk mitigation strategies, and monitoring program effectiveness. This is the most basic risk framework.

Enterprise risk management (ERM). ERM is a systematic approach to risk, requiring communication and coordination between the business units across your institution. Unlike basic risk management, it requires senior management involvement and continual assessment of risk.   

Related: ERM: Making the Connection 

Integrated risk management (IRM). IRM is a framework that supports the creation of a risk-aware banking culture. IRM elevates ERM by embracing technology to enhance decision-making and performance. 

Governance, Risk, and Compliance (GRC). GRC is a more comprehensive (and complicated) framework defined by the ability to achieve business objectives, address risk, and behave ethically. In contrast to the previously discussed frameworks, risk is just a part of GRC, not at the core of it.

How frameworks help financial institutions manage risk and achieve better business outcomes

All financial institutions need to address risk systematically. A baseline risk management program enables FIs to: 

  • Analyze the likelihood and impact of risks 
  • Implement the right controls 
  • Monitor control effectiveness 

Even the most rudimentary risk management programs proactively identify and mitigate risk, leading to increased stakeholder confidence and significantly better outcomes than an ad hoc approach. 

It’s always better to manage risk than to not manage risk, but the simplicity of basic risk management has limitations.  

Imagine your institution is competing with a nonbank lender with lower underwriting standards. You might be tempted to lower your underwriting standards too. Is that a good idea?  

Targeting borrowers with lower credit scores poses credit and fair lending risks. But how much risk? Does it align with your institution’s risk appetite?  What does the CFO think? What does your compliance department think? Different perspectives lead to more informed decision-making. 

A baseline approach to risk management, one where just one department decides whether to lower underwriting standards, doesn’t provide the full risk picture. Financial institutions need to adopt more mature risk management frameworks as they evolve and answer strategic questions so they can better understand opportunities and grow in a way that’s safe and sound.

Enterprise risk management (ERM)

ERM goes beyond basic risk management, adding value to an institution and boosting performance. The ERM framework differs from basic risk management in the following ways: 

  • It is an ongoing and continuous process led by senior leadership instead of a periodic activity conducted only by risk and compliance officers.  
  • It breaks down business siloes for a more comprehensive understanding of risk. 
  • Its goal is more than risk mitigation – it's better outcomes. 
  • It encourages a team-based approach to risk management. 
  • It is data focused. 

One of the key differentiators between ERM and risk management is the use of data to quantify risk and understand if activities align with your institution’s risk tolerance or if more or less risk exposure is appropriate.  

Related: ERM 101: What’s Your FI’s Risk Appetite

Integrated risk management (IRM)

Integrated risk management represents a level of risk management maturity beyond ERM, offering the following advantages: 

  • It takes an institution-wide approach to risk, fully integrating risk management into setting goals, assessing performance, and devising response plans. 
  • It enables FIs to take a data-driven approach, relying on longitudinal analysis to understand risk trends over time. 
  • It allows institutions to build a risk-aware culture where employees understand the value of risk management and compliance. 
  • It lowers compliance costs, reduces the expense of fraud and remediation, and provides strategic risk insights for new and current banking activities, allowing for more rapid decision-making. 

 IRM is a heavier lift than ERM, requiring systems for collecting and analyzing data. While it’s sometimes possible for smaller, less complex institutions to manage ERM with manual processes, IRM requires technology. The IRM framework can be a good choice for a financial institution with a growth mindset and the desire to systematically evaluate risk to understand the potential obstacles to achieving their goals and actively mitigate them.  

Related: Integrated Risk Management: Why and What?

Governance, Risk, and Compliance (GRC) Framework

The GRC framework was originally developed for Fortune 500 companies as part of the post-Enron reckoning. It dates to when risk management at financial institutions first evolved beyond financial risk and security risk to embrace all aspects of risk.  

GRC risk management was designed to correct the "silo mentality" that leads departments within an organization to hoard information and resources. It embraces the best of both ERM and IRM, with GRC systems integrating into every department of a financial institution to reduce risks, costs, and duplication of effort. It creates efficiency. 

Because it was designed for large, complex companies, the GRC framework is more resource-intensive than ERM and IRM. As a result, GRC is more suitable for larger financial institutions. Smaller institutions often find the ERM or IRM frameworks are a better fit, with the potential to layer GRC solutions on top as their risk management programs mature over time.

The risk framework hierarchy

The risk management framework hierarchy can be viewed as a pyramid with the simplest methodology (risk management) at the bottom and progressing up to IRM. GRC, with its focus on the largest institutions, can embrace either the ERM or IRM concepts. However, it can also operate independently from IRM or ERM if designed appropriately. Elements of GRC technology can also be used to implement ERM and IRM.

Risk Management Hierarchy

As financial institutions grow in size and complexity, their risk management approach must keep pace. Moving from a baseline risk management framework that identifies, assesses, and mitigates risks to an ERM framework that manages risk holistically across departments empowers FIs to pursue growth – while ensuring it’s protecting the institution, its employees, and consumers from adverse events. The shift to ERM represents a leveling up of your risk management program. 

IRM is an even more advanced and mature risk framework. It goes beyond leveraging ERM outcomes by ingraining risk management into an FI’s business strategy from the start. Integrated risk management takes a data science approach, combining past, present, and future trends for improved long-term decision-making.

Selecting the best risk management framework for your institution

To choose the best risk management framework, a financial institution needs to look inside and think about: 

  • The institution’s size and complexity. 
  • Organizational culture (process-oriented vs. people-driven). 
  • Strategic growth plans.  
  • Internal core competencies. While spending on technology is integral to more advanced risk management frameworks, FIs must also ensure they have the necessary resources. Does your institution have enough risk management staff and technology expertise to make a cross-functional approach to risk work? 
  • Support from the board and executive leadership. 

It’s also important to look at the risk environment. As risks confronting financial institutions multiply (e.g. macroeconomic uncertainty, concentration risk in commercial real estate, neo-bank challenges, the integration of digital banking services, etc.), financial institutions should take a hard look at their risk management needs and program. What worked during simpler times may not hold up as the number and depth of risks expands.

How technology can help you grow your risk management program and processes

The financial institutions best poised for future success are those that have carefully calibrated their risk management programs with the goals, capabilities, and the risk environment. Investing in technology is increasingly important, especially as financial institutions mature their risk management frameworks. It opens pathways to communication, makes it easy to quantify and proactively manage risk, and creates a dynamic exchange of information that improves decision-making and makes an institution more responsive.  

Often the terms GRC, ERM, and IRM are used interchangeably when it comes to technology. Don’t confuse the labels vendors use to describe their risk management solutions. Except for the largest institutions, GRC technology, ERM technology, and IRM technology serve the same purpose – creating a system where risks from across the institution can be consistently and comprehensively managed. Look at solutions to see which one best supports your goals.

Not every institution needs GRC. But whether it’s GRC vs. ERM vs. IRM, every institution needs a risk management framework that aligns with their goals. And technology will help get them there. 

Want a crash course on evolving your approach to risk management? Download our webinar: “Decoding Risk: ERM, IRM, GRC, and Everything In Between.”

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