Common Commercial Bank Risks

July 14, 2020

In every business and industry, there are risk exposures that must be addressed. The banking sector is no exception. Banks and other financial institutions face a wide range of risks, including several unique exposures to this important component of the world economy. There are many stakeholders involved in managing banking risks, including government entities. Commercial banking liability insurance forms the backbone of a robust strategy as a means of managing commercial bank risks. To further the role of risk management, understanding the risks inherent in the banking sector can help businesses protect the financial and information assets of their companies and their customers.

Systemic Versus Bank-Specific Risks

To begin our exploration of common banking risks, it can be valuable to learn the differences between the two primary categories of risk. Systemic risks, sometimes referred to as macro risks, affect the entire banking industry. Examples of systemic risks include the financial crisis in 2008, the implosion of the housing market the same year, and the financial challenges faced across the sector caused by economic instability in the wake of the coronavirus pandemic.

Micro risks, on the other hand, affect specific institutions or groups of similar institutions. Certain banking practices, including accidental or intentional acts on the part of banking employees, can be considered micro risks. Others may include cyber crimes like malware or ransomware attacks that attempt to access banking information unlawfully. Commercial banking liability is a complex field, but one factor is apparent; although the effects of macro and micro risks on banking institutions may differ, management of these risk exposures often takes similar approaches.

Typical Risk Exposures in Banking

Risks have evolved in the banking industry as new technologies and new business models have fundamentally changed daily operations. Information technology is the primary driver of this evolution; computer-based systems are used for data storage, electronic transfer of assets, and delivery of personalized banking services. While the goal of adopting technology in banking was to streamline operations, it opened the door to an entirely new class of risk: cyber liability.

Cyber exposures stand as the leading risk in the banking industry. In 2019 alone, over 25% of all malware attacks reported to authorities targeted banks and financial institutions. The theft or unauthorized access of banking data has cost the banking sector billions of dollars in losses, including commercial banking liability claims, forensic investigations, recovery efforts, and regulatory fines.

Cybercrime is certainly not the only risk banks face in the modern era. There are risks associated with many banking practices, and these risks must be considered when selecting commercial banking liability insurance and risk management solutions. Typical banking risks include:

• Risks to banking directors and officers from the actions of shareholders.
• Claims of non-compliance of regulatory banking provisions.
• Employee fraud and theft, including unauthorized access to or creation of accounts and embezzlement.
• Liability claims arising from physical loss or damage of assets.
• Derivative claims.
• Liability claims of unfair, discriminatory, or predatory banking and loan practices.
• Errors and omissions claims centered on wrongful transactions, foreclosures, and similar banking mechanisms.

The Role of Commercial Banking Liability Insurance

The banking sector experiences varied and ever-changing risks. When presented with the sheer volume of risks these financial institutions face, it becomes clear that a robust risk management approach is not only financially prudent but can mean the survival or loss of even the largest banking operations.

Not every bank is the same, however, and each institution faces its own unique risk exposures. For commercial banking liability insurance, one-size-fits-all insurance solutions may not be enough to mitigate the varied risks. To best protect the interests and assets of banks and their customers, specialized risk insurance brokers with in-depth industry knowledge are critical. Banking liability insurance offers protection in several significant areas, including:

• Fiduciary liability
• Errors and omissions (E&O) liability
• Employment practices liability
• Management liability
• Cyber liability
• Directors & Officers (D&O) liability
• Property and physical assets liability

In simple terms, commercial banking liability insurance is a foundational approach to risk management. With the right insurance protections in place, banks can provide economy-driving services to businesses and individuals. ◼