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Are you investing enough in your first line of defense?

Aug 03, 2023
By: Karen A. Mitchell
Financial Institutions

In the realm of risk management, the first line of defense holds a vital role in building resiliency within institutions. Comprised of frontline personnel and operational managers, the first line of defense plays a crucial part in identifying, mitigating and managing risks for its particular area.

Unfortunately, financial institutions often allocate significant resources to the third line of defense rather than enhancing the risk knowledge at the front line. This is often driven by regulatory pressures that focus on the importance of internal audit and compliance functions. While the third line of defense certainly plays a crucial role, extra investment in the first line of defense can yield greater benefits and enhance overall risk management effectiveness.

Why the first line matters

The members of the first line of defense are at the forefront of operational activities, giving them unique insight into potential risks. It stands to reason that being directly involved enables them to identify risks in real time, leveraging their understanding of the operational context and nuance. Above all else, the first line of defense facilitates the early detection and mitigation of risks, minimizing their potential impact leading to proactive risk identification.

The first line of defense also possesses in-depth knowledge and expertise of a specific critical area. They understand the intricacies of operational processes, inherent risks and the corresponding controls, and are better equipped to implement effective risk mitigation strategies. By integrating risk management into their day-to-day operations, the first line of defense minimizes the likelihood and impact of risks, which fosters resiliency and leads to greater risk mitigation.

The first line of defense plays a significant role in ensuring compliance with policies, procedures and regulatory requirements. By embracing their responsibility for compliance, they contribute to the overall risk management framework. This ownership mindset strengthens the institution’s resiliency, as risks are proactively addressed and managed at the operational level. A greater sense of ownership, by extension, improves accountability.

Setting an example

Most importantly, the first line of defense sets an example for others, showcasing the importance of identifying and managing risks. A proactive approach to risk identification and mitigation inspires a risk-aware mindset among employees, fostering a culture where risk management becomes embedded in the institutional DNA. A culture of risk awareness promotes resilience by ensuring that risks are considered in decision-making processes across all levels.

 In the event of an incident which requires immediate attention, the first line of defense is often first to respond, which minimizes disruptions and helps restore normal business operations. Their communication and collaboration with other risk management stakeholders allows for valuable insight and enhances the institution’s ability to respond to emerging risks.

Embracing and empowering the first line of defense as a key component of risk management efforts is essential for institutions seeking to build a strong foundation of resilience in today's dynamic business environment. Too often, not enough investment happens at the front end, resulting in unnecessary expense at the back end. Consider your investment in your front line. Do they have the skills and risk awareness to enhance your risk management system?

How Wipfli can help

Let Wipfli help your financial services organization better understand and manage risk. We provide you the knowledge, technology and support you need to become a more forward-facing, strategic organization. Contact us today for more on how we can help.

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Karen A. Mitchell
Senior Manager, Risk Advisory Services
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