In this insightful podcast episode, host Ed Vincent is joined by risk assessment experts Beth Watson and Michael Glotz to delve into the topic of risk maturity frameworks and the importance of using five lanes instead of three for assessing risks. Discover why this shift can revolutionize risk evaluations and lead to better decision-making for businesses of all sizes.
During the discussion, it became clear that as organizations mature, a more nuanced approach to risk assessment becomes imperative. The conventional three-lane system (green, yellow, and red) often limits the ability to detect subtle changes and assess risks accurately. By introducing five lanes, businesses can unlock a wealth of benefits, including improved differentiation, enhanced visibility into risk movements, and alignment with regulatory standards.
Michael Glotz, an experienced risk professional, shares a crucial insight. In a three-lane model, risk ratings tend to stagnate, making it challenging to showcase any meaningful changes over time. However, with the expansion to five lanes, organizations gain the ability to demonstrate movement within each category. From light green to dark green or lighter red to darker red, these incremental shifts offer a more comprehensive and dynamic understanding of risks and their evolution.
Another compelling reason to adopt the five-lane approach lies in regulatory compliance. Regulators, such as the OCC and FDIC, use a five-point rating system to assess banks. By aligning their risk assessments with this established framework, businesses can ensure consistency and effective communication with regulatory bodies. This alignment fosters mutual understanding, facilitates compliance, and strengthens the relationship between banks and regulators.
In summary, transitioning from three lanes to five in risk assessments brings about a paradigm shift. It allows for greater differentiation, improved visibility, and alignment with regulatory standards, leading to more informed decision-making for businesses across industries.
Listen or watch the full recording below.