Risk impacts every part of a financial institution. Building a functional risk management program isn’t just about mitigating compliance and operational risk — it’s crucial to keeping FIs strong and safe in the long term.
Whether you’ve unexpectedly lost a risk officer, face regulatory pressure to formalize risk management, or simply need a more structured approach, creating a compliant, effective risk management program that safeguards your institution for the future is critical.
Related: What is the Risk Management Process?
Table of Contents
- Why Risk Management Matters
- Choosing a Risk Framework
- Building the Program
- Governance and Board Oversight
- Meeting Regulatory Expectations
- FAQs
Why your FI needs a risk management program
A risk management program is the formal, structured, and ongoing framework an organization uses to manage risks. It ensures risks are identified, assessed, controlled, monitored, and reported on continuously and consistently.
Without structured risk management, risks go unnoticed and unmitigated, impacting other areas of your organization. Common risks include:
-
Compliance risk: Failure to meet requirements set by the OCC, Federal Reserve, FDIC, FINRA, and state or federal regulators can trigger enforcement actions, financial penalties, consent orders, and restrictions on growth or activity.
-
Operational risk: Poorly managed risks increase the likelihood of losses from fraud, internal errors, and breakdowns in essential processes.
-
Financial risk: Ineffective risk management drives up capital requirements and insurance costs and hinders the ability to attract deposits, investments, or market funding.
- Reputational damage: Losing customer, stakeholder, or investor trust can permanently damage the institution's standing and is often extremely difficult to repair.
Related: Risk Management Controls in Banking
What happens when you ignore risk
Doing nothing about risk is not a strategy — it’s a gamble. It allows problems to grow unchecked, leading to greater exposure and potential losses down the line. The FIs that thrive are those that face risks head-on with structured programs designed to identify, assess, and manage threats before they become crises.
Related: Risk Management Strategies for Financial Institutions
Choosing the right framework for your FI
It’s crucial to match your risk management framework to your FI's size and complexity. A $500 million community bank doesn't need the same Three Lines of Defense as a $50 billion regional FI, but it still requires clear risk identification, assessment, monitoring, and reporting.
Where to focus first
Identify your institution's business model and current vulnerabilities:
-
Mortgage companies typically need to start with credit risk and compliance — understanding loan quality, underwriting standards, and the dense regulatory environment around consumer lending.
-
Wealth management firms and Registered Investment Advisers (RIAs) often prioritize operational risk and fiduciary compliance, given the potential for advisor misconduct, trading errors, and breach of fiduciary duties.
-
Traditional banks and credit unions usually need to build capabilities across credit, operational, and compliance risk, as these are fundamental to banking operations.
Not sure where to start? Begin with operational risk as it touches everything and drives conversations about process documentation, controls, and accountability that benefit all risk categories.
Related: Risk Management 101: Risk Assessments for Financial Institutions
Building a risk management program from scratch
Building a fully functional risk management program takes time — usually 18-24 months. The timeline depends on organizational size, complexity, regulatory pressure, and resources.
Months 1-3: Establishing governance
The initial phase focuses on creating the foundation:
- Create or empower a board risk committee
- Define the risk officer role and authority
- Complete a comprehensive risk assessment outline that identifies major risk categories and prioritizes them
- Begin developing a risk appetite statement that articulates how much risk the institution is willing to accept in pursuit of its objectives
- Identify software partners that would facilitate the program
Months 4-9: Building core infrastructure
This phase involves developing the foundational documents and processes that everything else will build upon:
- Develop policies and procedures for major risk categories
- Implement basic risk reporting to the board and management
- Establish key risk indicators for monitoring
- Select and implement risk management software
- Get business lines involved early to build buy-in
Months 10-18: Becoming operational
During this phase, the program becomes operational across the organization:
- Train staff in their risk management possibilities
- Implement risk assessment processes within business lines
- Document the control environment
- Establish incident reporting and management processes
- Begin regular testing and validation of controls
The risk function starts moving from purely reactive to proactive, identifying emerging risks before they become problems.
Months 19-36: Maturation and sophistication
The final phase focuses on enhancement:
- Enhance risk modeling and quantification capabilities
- Develop scenario analysis and stress-testing frameworks
- Implement more advanced risk analytics
- Refine the integration between risk management and strategic planning
By the end of this period, risk management should feel like a natural part of your FI’s operations rather than a compliance exercise. You can then use your risk management program to help make strategic decisions in your organization.
Related: High-Impact Risk Management: Key Strategies for Financial Institutions
Establishing tone from the top: governance and board-level oversight
Effective governance connects risk oversight to accountability. When building from the ground up, establish clear structures that define who is responsible for risk decisions, how information flows to decision-makers, and where authority resides.
Board risk committee structure
Create a board-level risk committee with a charter that defines:
- Meeting frequency (quarterly minimum, monthly during buildout)
- Committee composition (members with financial services experience and risk management knowledge)
- Explicit authority over risk appetite, major policy approval, and risk officer hiring/compensation
- Required reporting and decision rights
- Relationship with other board committees
The charter should distinguish between what the committee approves (risk appetite framework, major risk policies) versus what it reviews (risk profile monitoring, significant risk events, program adequacy).
Management risk committee
Establish a management-level committee that meets monthly and includes senior leaders from business lines, compliance, internal audit, and operations. This committee reviews emerging risks, monitors indicators, coordinates risk activities across the organization, and escalates issues to the board committee.
Risk officer positioning
Structure the risk officer role with direct CEO reporting for operations, dotted-line reporting to the board risk committee, direct board access, authority to escalate concerns without retaliation, and evaluation input from the board risk committee.
Related: How to Set Up a Risk Committee
Meeting regulatory requirements as you build
Balancing regulatory demands and building a strong risk program is challenging when starting from scratch with limited resources. Keep these tips in mind as you build out your program:
-
Understand requirements vs. best practices. Regulators primarily look for evidence of a functioning framework and management awareness, not sophisticated quantitative models or comprehensive policy manuals. Focus on governance structure, board oversight, risk identification processes, and basic reporting.
-
Build for expansion, not perfection. Create governance structures and core policies that satisfy examiners now but can be enhanced later without complete rewrites.
-
Prioritize strategically. Focus resources on your institution's greatest threats — typically credit risk for lenders, operational and compliance risk for wealth managers.
-
Communicate proactively with regulators. Show regulators a credible plan, evidence of progress, and management commitment. They become concerned when they see no progress or repeatedly missed deadlines without explanation.
Related: What You Need to Know Ahead of Your FI's Next Exam
Frequently Asked Questions (FAQs)
Our risk officer left — what do we do next?
If your FI loses its risk officer unexpectedly — whether through retirement or another reason — or regulators call out risk management deficiencies, leadership needs to act quickly. In my years working with FIs, I’ve seen enforcement actions and even bank failures that were tied to inadequate risk management.
Put simply, start taking action.
| Timeframe | What to Do |
| Immediately |
Designate an interim risk leader — typically from compliance, internal audit, or senior management — with strong analytical skills and institutional knowledge. This role must have explicit authority and direct board access, even if temporarily. The role may be filled by an internal leader, consultant, or external resource. Conduct an immediate inventory of critical risk functions: regulatory reports due, upcoming risk committee meetings, and in-process monitoring activities. |
| First Two Weeks |
Engage your primary regulator to explain the situation and outline interim plans. Proactive transparency builds credibility and reduces supervisory risk. Assess existing documentation, data, and systems to distinguish what is operational versus what was dependent on the departed officer’s institutional knowledge. |
| By Day 30 |
Stabilize critical operations by ensuring board risk committees continue meeting with adequate information, regulatory filings remain timely, and key risk indicators are actively monitored. Begin the permanent search for a risk officer, using executive recruiters or internal succession planning, while recognizing that placement may take 3–6 months. |
| Days 30-60 |
Enhance program quality through working sessions with business line leaders to reinforce first-line risk ownership and accountability. Evaluate external support needs, including consultants or contract risk officers, to supplement capacity during the transition. Provide regular board updates on risk program stability, emerging issues, and transition progress during this elevated-risk period. |
When should we invest in risk management technology versus using manual processes?
Ultimately, this decision will come down to your FI’s maturity and complexity.
It's time to invest when manual data consolidation delays reporting or reduces its frequency. FIs with $250 million or more in assets typically need more than spreadsheets or emails to track risks, connect controls, validate effectiveness, and report to the board.
When considering a risk management platform, find one that offers knowledge-as-a-service (KaaS), including information about emerging risks and updates you should make to your risk assessments and program.
What are the biggest mistakes institutions make when building a risk program from scratch?
- Over-complicating the initial program. FIs often adopt complex risk rating methodologies, elaborate quantitative models, or comprehensive policy frameworks that are difficult to maintain. Without effective automation, these processes become unmanageable. Build what you can sustain, make it work reliably, then enhance.
- Not involving business lines and management from the outset. Excluding them guarantees program failure. Secure buy-in and participation from all key stakeholders.
- Treating risk as a documentation exercise. Don’t substitute impressive policy manuals, risk assessment reports, and governance charters for real impact on daily activities. Team engagement is crucial for a strong risk culture.
- Underestimating resource requirements. One risk officer can’t build and maintain a comprehensive program for a complex FI. Also, you can’t expect existing staff to absorb additional risk responsibilities, as it leads to burned-out staff, delays, and declining programs. If necessary, execute a narrow program well, rather than a broad one poorly.
- Copying approaches without customization. Don’t directly copy another organization's methods. Your business model, size, complexity, culture, and risk profile are different. Use industry or software templates only as starting points — always adapt your program to your specific circumstances.
Want to learn how centralizing and systematizing your risk management processes can protect your FI? Get the details in our free Enterprise Risk Management Buyer’s Guide.
