From Risk Elimination to Risk Management: The Mindset Shift Financial Institutions Need to Innovate
Rafael DeLeon is senior vice president of industry engagement with Ncontracts, Brentwood, Tenn.
For decades, the financial services industry has been driven by a singular mindset: eliminate risk. In a heavily regulated environment, that instinct is understandable. Financial institutions have spent years building layers of oversight to ensure compliance, prevent losses and protect customer trust.
But as technology reshapes the industry, an “eliminate all risk” mindset has become an obstacle to innovation.
Today, growth requires more than avoiding danger. It requires managing it. The future belongs to institutions that understand the difference between risk elimination and risk management and can balance both compliance and innovation.
The Legacy of Playing It Safe
Historically, risk has been treated as something to be minimized, not managed. Regulations have conditioned institutions to equate safety with zero tolerance for uncertainty. Departments often operated in silos, each focusing narrowly on their area of exposure rather than on how risks interact across the enterprise.
This approach made sense when stability was the ultimate goal. But in an era of digital transformation, AI and evolving customer expectations, absolute safety can actually introduce new vulnerabilities. When every new idea is filtered through a “what could go wrong” lens, innovation slows or stops altogether.
Emerging regulatory guidance, such as Fannie Mae’s cybersecurity and resiliency requirements and state-level laws around AI use in lending, underscores that risk cannot be avoided; it must be actively managed. These updates don’t ask institutions to stop using new technologies but rather demand that banks and lenders deploy them responsibly.
Why Risk Management Is the New Competitive Advantage
Modern risk management is about knowing when to say “yes” to new ideas and innovation and how to do so safely. Effective governance frameworks, such as the Three Lines Model (formerly known as the Three Lines of Defense), create the structure needed to enable innovation without sacrificing control.
The first line owns and manages risk in day-to-day operations. The second provides oversight, ensuring business activities stay within risk appetite. The third, internal audit, offers independent assurance. When all three lines collaborate, institutions can pursue new opportunities with confidence, knowing the right checks and balances are in place.
This approach transforms risk from a constraint into a source of strategic value. It allows banks, credit unions and lenders to test new products, partner with third parties, and leverage technologies like AI or automation, while maintaining compliance and protecting their reputation.
Innovation Requires Measured Risk
Every innovation involves uncertainty. Launching a new digital lending platform, experimenting with cash-flow underwriting, or adopting generative AI for compliance monitoring all carry risk. The question isn’t whether risk exists, but whether it’s being measured, monitored and managed.
Institutions that adopt enterprise risk management (ERM) platforms can quantify risk more effectively, aligning business strategy with regulatory expectations. For example, before deploying AI, financial institutions can perform risk assessments, monitor algorithmic bias and ensure explainability. That’s proactive risk management; not risk elimination.
Similarly, when financial institutions implement new cybersecurity frameworks or vendor integrations, the goal isn’t to avoid third-party risk entirely. It’s to ensure visibility and control through vendor risk management tools, regular testing and defined recovery plans.
Building a Culture That Balances Caution and Innovation
Shifting from a risk-averse to a risk-aware culture starts with leadership. Executives and boards must redefine success to include not only loss prevention but also innovation enablement. The tone from the top should reinforce that prudent risk-taking, when supported by strong controls and transparency, drives progress.
Open communication across all three lines strengthens this culture. When risk is viewed as a shared responsibility rather than a departmental barrier, collaboration flourishes. Employees become empowered to identify, escalate and manage risks as part of daily decision-making versus just during audits or exams.
Turning Risk into Opportunity
Risk elimination is impossible and trying to achieve it can be costly. Financial institutions that continue to “play it safe” risk falling behind competitors who embrace managed, measured innovation.
True resilience comes not from avoiding uncertainty but from mastering it. By replacing fear of risk with a framework for managing it, financial institutions can innovate with confidence, meet regulatory expectations and build the kind of agility that the future demands.
(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)
