The Future of Risk Management: Adapt or Fall Behind

By Ed Young, Managing Director, Empyrean Solutions

The past 18 months have been a wake-up call for the banking industry. Market instability, sharp interest rate fluctuations, and economic uncertainty have forced financial institutions to rethink risk and performance management strategies. While some banks have made significant strides in adapting to this new environment, others are still lagging behind, hindered by outdated tools, rigid processes, and cultural resistance to change.

The financial institutions that will thrive in 2025 and beyond will be those that embrace a more agile, data-driven approach to risk and performance management. Those that continue to rely on legacy systems and inflexible planning processes risk falling behind—not just in profitability but in overall financial stability.

The Profitability Blind Spot 

Results from a market survey conducted by Empyrean Solutions in late 2024 revealed a striking gap in profitability analysis. Despite nearly 70% of income in the banking industry coming from Net Interest Margin (NIM), a surprising two-thirds of institutions still do not use a formal Funds Transfer Pricing (FTP) process to measure and analyze profitability. Even more concerning, a quarter of institutions are not measuring profitability at all.

Without a clear understanding of which products, customers, and business units are generating returns—and which are dragging down performance—banks are operating in the dark. Strategic decisions based on incomplete or outdated profitability data can lead to costly missteps, misallocated resources, and missed growth opportunities.

Financial Planning Must Be Agile, Not Annual

Another major challenge facing financial institutions is the lack of agility in financial planning and forecasting. The traditional approach of setting a static, annual budget and reviewing it once a year is no longer sufficient in a world where economic conditions shift rapidly. 

Yet our survey found that only 21% of financial institutions reforecast their balance sheet and income statement on a monthly basis. This means that nearly 80% of institutions are not making dynamic adjustments in response to changing market conditions.

With market volatility here to stay, institutions need to prioritize flexible, current financial planning that integrates risk management and profitability analysis. Those that fail to do so will struggle to navigate periods of economic uncertainty effectively.

Risk Management: From Compliance to Competitive Advantage

Risk management in banking has historically been viewed as a compliance necessity—a checkbox exercise driven by regulatory requirements. But leading institutions are now shifting towards a more proactive, strategic approach to managing financial risk.

Liquidity risk, interest rate risk, and credit risk are top concerns for financial leaders in 2025. The collapse of several high-profile banks in 2023 reinforced the importance of robust liquidity stress testing. While many banks have improved their scenario analysis capabilities, three quarters of surveyed institutions still only conduct risk modeling on a quarterly basis—an outdated practice in today’s fast-moving environment.

Financial institutions must move beyond traditional compliance-driven risk management and embrace a more dynamic, technology-driven approach that continuously assesses risk exposure and adapts to emerging threats. 

Technology is the Key to Success

Technology is no longer a nice-to-have; it’s an essential component of modern banking. The ability to seamlessly integrate financial planning, profitability analysis, and risk management is what will separate the leaders from the laggards in the years ahead.

The most forward-thinking banks are already investing in advanced analytics, automation, and integrated software solutions that enable more precise decision-making, faster scenario analysis, and more accurate financial forecasting.

The Bottom Line

Financial institutions can no longer afford to treat risk management, financial planning, and profitability analysis as separate silos. The financial landscape is evolving too quickly, and those that fail to adapt will be left behind.

Institutions that embrace technology, break down internal barriers, and commit to continuous improvement will not only survive but thrive in this new era of banking.

The question for finance and risk leaders today is simple: Are you ready to adapt?

Our 2025 Banking Trends Survey and report is now available for download on our website – access your copy today.