When it comes to risk management, knowing where and how much to spend can be challenging.
As a former risk management officer, I know this concern firsthand, and it continues to be a crucial topic during our conversations with financial institutions (FIs). Proper risk management isn't just about identifying and addressing risks; it's also about understanding risk from an economic perspective. That's where the FAIR model comes in.
The challenge isn't just identifying where to spend — it's building confidence that your spending priorities are based on credible risk measurements. Most would agree that spending priorities should align with an FI’s risk levels, focusing resources on the most materially impactful risks that could negatively affect your FI's ability to achieve its goals or significantly strain your capital and budget if left unmanaged.
However, what often gets debated is the validity of the risk measurements themselves. When risk assessments lack consistent methodology or rely on subjective judgments rather than credible data, stakeholders question whether the prioritization is trustworthy. This uncertainty undermines confidence in risk management decisions and can lead to misallocated resources.
This challenge is precisely why consistently measuring risk and leveraging credible, proven data wherever possible is so important — and why the FAIR model provides such a valuable approach for financial institutions.
So, how does FAIR address these measurement and credibility challenges? Let's examine what makes this model different and how it can work for your institution.
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The Factor Analysis of Information Risk (FAIR) is a model for understanding, analyzing, and quantifying risk in financial terms. It was established by the FAIR Institute, a not-for-profit organization made up of risk officers, cybersecurity leaders, and business executives employing the model. Unlike traditional qualitative risk assessments, FAIR provides a structured, quantitative approach that enables FIs and other organizations to understand and manage cyber and operational risks more effectively.
The FAIR model can be broken down into a simple yet powerful formula:
Risk = Loss Event Frequency × Loss Magnitude
The Loss Event Frequency is how often an event (e.g., a data breach) is expected to occur. The Loss Magnitude is the cost of the event if it happens. You may recognize these concepts by different names. Many risk management frameworks, including the well-established COSO Enterprise Risk Management (ERM) Framework, refer to Loss Event Frequency as 'Likelihood' and Loss Magnitude as 'Impact.' Regardless of terminology, the fundamental principle remains the same: quantifying both the probability and potential cost of risk events.
An important note: FAIR doesn't require perfect data to deliver value. The framework is designed to work with thoughtful estimates and available information, making it accessible for institutions of all sizes and experience levels. The framework accommodates educated estimates, industry benchmarks, and reasonable assumptions — all clearly documented and defensible.
By analyzing these factors, FIs can assess risk in dollars and cents, prioritize threats based on financial impact, and make more informed decisions about where to invest in controls or mitigation.
Related: What is Dynamic Risk Management and How Does It Work?
FAIR can be applied to many risk areas, including cybersecurity, operations, and compliance.
When a vendor incident occurs, quantifying the full financial impact helps you understand costs that extend far beyond immediate response expenses:
Related: Stay updated on the latest enforcement actions with our Enforcement Action Tracker.
The “Impact,” or Loss Magnitude, of a potential event may seem abstract if your FI is small or has never experienced a significant incident, such as a data breach. However, that doesn’t mean the coast is clear. Optimism bias — the belief that someone or a company is less likely to experience an adverse event than others — is a common way FIs cloud their judgment regarding risk assessments and decision-making.
Think of it like this: You’re a small castle. You might not have the resources of a fortress (i.e., a larger FI). However, you still need strong defenses — maybe even stronger, because even seemingly minor cyber incidents can lead to significant consequences. According to a survey, 18% of banks reported that the May 2023 MOVEit data breach compromised their customers’ data. Notably, 14% of these institutions were affected through third- or fourth-party relationships, underscoring the need for strong vendor management practices.
Just because your FI doesn’t have extensive incident histories or sophisticated data analytics capabilities shouldn't prevent you from implementing FAIR. In fact, your size can be an advantage. Leverage whatever real, credible, and quantifiable data you can get your hands on. Your client base may be smaller and more knowable, your vendor relationships more direct, and your operational processes easier to map and quantify.
Start with the basic data points you have: average account balances, typical transaction volumes, number of clients per product line, and annual revenue figures. Combine these with industry breach cost data and threat frequency estimates to build your initial FAIR calculations. You don't need a data science team — you need practical estimates that help you make better resource allocation decisions than gut feeling alone.
As financial institutions of all sizes manage growing networks of vendors — sometimes numbering in the hundreds or thousands — the likelihood of vendor-related incidents naturally rises. Add to this the rise of AI and other advanced technology, and you have even more risks to consider.
The good news is that FAIR will scale with you as your FI continues to grow and face new challenges.
While FAIR is used by risk management and cyber professionals, the formula is only the start of exploring your FI’s risk connections. Remember these best practices as you begin your risk calculations and share them with stakeholders.
If your financial institution hasn’t experienced a breach or major incident, historical and industry-wide data sources, such as the Verizon Data Breach Report, MITRE metrics, and IBM reports, can help calculate realistic, evidence-backed losses.
Remember that consistency in methodology matters more than perfection in data. Document your reasoning and maintain the same analytical approach across all risk assessments to build stakeholder confidence in your prioritization decisions.
You'll get specific financial estimates of potential incident impacts, helping you understand the true cost of vendor-related disruptions, and make informed decisions about incident response investments. This data becomes powerful information for your IT steering and risk committees and the board.
Related: Expert Q&A: How to Assess Vendor’s Data Recovery Capabilities
Many traditional security tools are inherently reactive, providing delayed updates on past events without meaningfully quantifying risk. You need tools to help your FI avoid cyber threats and other hazards.
Combining FAIR with risk indicators of cybersecurity environments helps you evaluate your organization’s vulnerability to ransomware and data breach threats. When you align these indices with your organization’s specific situation, they provide relevant threat intelligence for your sector and turn technical signals into valuable business insights.
Related: Ransomware Risk Management: How to Defend Your FI Against Cyber Attacks
Financial institutions can directly link cybersecurity and third-party risk management investments to potential financial losses by quantifying risk with the FAIR model. When your institution’s current spending is just a fraction of what a significant incident could cost, it shifts the conversation with the board. You no longer have to defend your budget — you can show the return on risk mitigation.
Your story will build confidence, secure buy-in, and turn vendor risk into a measurable, manageable part of your broader risk strategy.
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Explore how integrated risk management tools and a high-impact risk management approach can help your FI anticipate challenges, adapt to change, and strengthen resilience in our on-demand webinar.