Understanding the Risk-Based Approach for Better Risk Management

What happens when financial institutions prioritize every risk equally, without assessing their potential impact or likelihood?

A confidential assessment by the U.S. Office of the Comptroller of the Currency (OCC) found that half of the 22 large banks it supervises have "insufficient" or "weak" management of various risks, including cyberattacks and employee mistakes. Additionally, following the announcement of unexpectedly large U.S. tariffs by the Trump administration in April 2025, derivative-related margin calls at hedge funds and other market participants surged, nearly tripling during April 2–10. 

These developments underscore the limitations of traditional risk management approaches that treat all risks with equal urgency. By not differentiating between risks based on their potential impact and likelihood, businesses may misallocate resources, addressing minor issues while overlooking more significant threats.

A risk-based approach to risk management offers a solution by enabling companies to prioritize risks that pose the greatest threat to their objectives. This method ensures that resources are allocated efficiently, focusing on areas that could significantly impact your business performance and compliance.

In this blog, we delve into the principles of the risk-based approach, its advantages over traditional methods, and practical steps for implementing it to enhance your business's resilience and decision-making processes.

What Is a Risk-Based Approach to Risk Management?

A risk-based approach to risk management prioritises the most significant risks based on their potential impact and likelihood. This strategy is pivotal within Enterprise Risk Management (ERM), especially for businesses that operate in highly regulated sectors such as fintech, crypto, and digital assets. Instead of following a one-size-fits-all approach, a risk-based method allows businesses to identify key risks, assess their severity, and direct resources toward mitigating the most impactful risks.

In ERM, adopting a risk-based approach means that resources aren’t spread too thin across every possible risk. Instead, businesses can be more agile, focusing on the risks that have the most potential to affect their core operations or regulatory compliance. This way, companies can maintain resilience, meet regulatory obligations, and better manage unforeseen challenges. 

Key Aspects of a Risk-Based Approach:

• Focus on Critical Risks: By addressing risks that could threaten your core business objectives, your company can minimize unnecessary resource expenditure.
• Customized Risk Assessment: This flexible approach allows businesses to evaluate risks unique to their operations and industry.
• Informed Decision-Making: With better insight into potential risks, businesses can make smarter, more informed decisions on where to allocate their resources.
• Advanced Risk Management: Risks are prioritized and addressed before they escalate into significant threats, enabling timely action and mitigation.

By making the risk management strategy meet the business's specific needs, businesses can anticipate potential challenges and focus on long-term sustainability. As you move forward, it's important to understand how a risk-based approach sets itself apart from traditional methods.

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How Does a Risk-Based Approach Differ from Traditional Methods?

In traditional risk management, you likely follow rigid rules or checklists that treat every risk as equally important. While this may ensure that you meet basic compliance requirements, it doesn’t account for the complexity of risks, especially in industries like fintech or crypto, where risks constantly change. This can lead to wasted resources on less impactful risks, leaving you vulnerable to more pressing threats that emerge unexpectedly.

On the other hand, a risk-based approach allows you to prioritize risks based on their true impact and likelihood. This means you can focus your resources on the risks that matter most to your business, adapting to new challenges. It’s a more flexible, dynamic method that ensures you’re always addressing the most critical issues with the right level of attention.

The table below highlights how these two methods differ, showing why a risk-based approach is better for businesses like yours.

The risk-based approach ensures that your risk management efforts are dynamic, addressing high-priority threats first, without a rigid checklist or rulebook constraints. Now, let’s explore how this approach can benefit your business in multiple ways.

Benefits of Applying a Risk-Based Approach Across the Business

Adopting a risk-based approach to risk management offers many benefits that help streamline operations and reduce exposure to potential threats. It allows you to prioritize high-impact risks, allocate resources efficiently, and maintain strong governance across your business. This approach helps safeguard your company against disruptions while ensuring compliance and operational continuity.

1. Improved Resource Allocation

A risk-based approach ensures that resources are allocated to the areas that pose the most significant risk to your business. Instead of spreading efforts thin across all risks, you focus on what truly matters, ensuring that time and money are spent where they will have the most impact.

2. Better Threat Anticipation

This approach helps you avoid potential risks by continuously monitoring emerging threats. By anticipating issues before they escalate, you can take proactive steps to avoid disruptions, saving your business from costly surprises.

3. Stronger Governance and Compliance Oversight

Implementing a risk-based strategy strengthens your governance and ensures better compliance. By clearly defining risks and establishing controls, you make compliance a part of your business framework, reducing the chances of violations.

4. Higher ROI Through Optimized Risk Management

By focusing on high-priority risks, you reduce the resources spent on minor issues and increase the efficiency of your risk management efforts. This allows for a better return on investment, as you avoid unnecessary expenses and penalties from non-compliance.

5. Increased Resilience to External Shocks

A risk-based approach helps your business respond more effectively to external threats, such as market changes or regulatory shifts. Your company can quickly adapt to disruptions by preparing in advance, ensuring continuity during uncertain times.

6. Facilitates Continuous Improvement

}Risk management is an ongoing process. A risk-based approach encourages constant refinement, ensuring your strategies evolve as new risks emerge, so your business remains agile and better prepared for future challenges.

The overall benefit is a more efficient operation, with less exposure to risks that could hinder long-term growth. As we move forward, let’s look into the key steps involved in implementing a risk-based approach

Key Steps to Implementing a Risk-Based Approach to Risk Management

The journey to implementing a risk-based approach doesn’t have to be overwhelming. By breaking it down into clear, actionable steps, you can start strengthening your business's risk management framework today. Each step helps you prioritize high-risk areas, allocate resources effectively, and make informed decisions.

1. Identify Risks Across Business Units and Processes:

The first critical step is identifying the various risks across your business. Knowing the risks you face will allow you to develop a comprehensive risk management strategy, whether financial, operational, regulatory, or strategic.

• Financial Risks: Market volatility, interest rate changes, liquidity issues, or unexpected economic shifts.
• Operational Risks: Internal processes, cybersecurity threats, supply chain disruptions, or system failures.
• Regulatory Risks: Non-compliance with local or international laws, including money transmitter licensing and crypto regulations.
• Strategic Risks: Changes in market dynamics, competitors, or shifting consumer preferences that could impact long-term goals.

Identifying your business's full spectrum of risks is the first step toward building an effective risk management framework.

2. Assess Risk Impact and Likelihood:

Once you've identified the risks, it’s time to assess their potential impact and likelihood. This step helps you prioritize which risks require immediate attention and can be monitored over time.

• Risk Scoring: Assign risk scores based on the likelihood of occurrence and the potential severity of impact. This helps you quantify each risk, making determining which ones need the most attention easier.
• Impact vs. Likelihood: Evaluate both the probability of the risk occurring and the extent of damage it could cause. This helps you avoid overestimating minor risks or underestimating high-impact threats.

This assessment ensures that your business focuses its resources on the most pressing risks that could seriously impact operations or compliance.

3 .Prioritizing Risks:

Once risks are assessed, the next step is to prioritize them based on how they align with your core business goals. Risks that threaten the continuity of your operations or violate compliance must be addressed immediately.

• Focus on Critical Areas: Identify risks that could disrupt operations, cause financial losses, or expose the business to compliance violations.
• Risk Tolerance: Determine the level of risk your business is willing to tolerate based on its impact on revenue, reputation, and compliance.

By prioritizing risks tied to core business functions, you ensure that resources are focused on what matters most.

4. Design and Deploy Mitigation Controls:

After prioritizing risks, it’s time to design mitigation strategies and controls that help minimize or eliminate the risks. Adequate controls ensure that you stay compliant and prepared for potential disruptions.

• Compliance Policies: Create or update compliance programs to ensure they are aligned with regulatory requirements, including AML and financial reporting standards.
• Operational Controls: Develop systems for operational risk management, such as disaster recovery plans and cybersecurity protocols.
• Monitoring Systems: Implement systems that allow continuous monitoring of risks, ensuring that you are always aware of any changes or new threats.

These mitigation controls help ensure your company can continue functioning smoothly and remain compliant.

5. Monitor, Reassess, and Adapt Continuously:

Risk management doesn’t end with the deployment of controls. Continuous monitoring and adaptation are necessary to stay ahead of emerging risks and to refine your strategy as circumstances change.

• Regular Reviews: Schedule periodic assessments to review your risk management strategies and ensure they’re still relevant.
• Adaptive Strategies: Adjust your strategies based on real-time data to account for new threats and changing business conditions.

Constant reassessment helps you stay agile and ready to address new risks as they arise.

6. Document Everything for Transparency and Oversight:

Proper documentation supports audits, compliance checks, and internal reviews, ensuring transparency and accountability in risk management practices.

• Risk Logs: Maintain detailed logs of identified risks, mitigation efforts, and outcomes.
• Audit Trails: Document all decisions, actions, and controls to facilitate internal audits or regulatory inspections.

Accurate documentation records your efforts and demonstrates your commitment to regulatory compliance and business resilience. 

Each of these steps ensures your business is well-prepared to handle emerging risks. As we close this section, let’s discuss how a risk-based approach strengthens overall risk management.

How does the Risk-Based Approach Strengthen Overall Risk Management?

The risk-based approach goes beyond addressing compliance concerns; it helps strengthen your overall risk management strategy. By prioritizing critical risks and focusing resources where they’re most needed, you ensure business continuity and increase decision-making effectiveness.

Moreover, this approach helps mitigate risks across various areas, from cybersecurity to financial operations, and even Environmental, Social, and Governance (ESG) factors. It aligns your risk management strategy with your business's broader goals, ensuring long-term success and resilience. Now, lets now discuss about the common pitfalls to avoid while shifting.

Common Pitfalls to Avoid When Shifting to a Risk-Based Model

While the benefits of a risk-based approach are clear, transitioning to this model can present challenges. Awareness of common pitfalls can help you avoid missteps and ensure the success of your efforts.

Common Pitfalls:

• Siloed Risk Assessments: Risk assessments conducted in isolation can lead to incomplete insights. It’s essential to integrate risk assessments across all departments and processes.
• Poor Data: Your risk assessments and mitigation strategies may be flawed without accurate, reliable data. Invest in data quality and ensure it’s up-to-date.
• Lack of Executive Support: Successful implementation of a risk-based approach requires buy-in from leadership. Without top-level support, the necessary resources and authority for implementation may be lacking.

Avoiding these pitfalls ensures a smoother, more effective transition to a risk-based model. As you shift towards this model, platforms like Fraxtional can provide valuable support to guide you through the process.

Implement a Risk-Based Approach with Fraxtional’s Expertise

Managing risks in today’s complex regulatory landscape requires more than just compliance, it demands a strategic, flexible approach. Fraxtional offers tailored solutions to help your business adopt a risk-based strategy, with on-demand leadership and expert risk management and compliance guidance.

Here’s how Fraxtional can help:

• Fractional Leadership: Access on-demand experts like CCOs and CROs to guide your risk management without full-time hires.
• Tailored Risk Assessments: Get customized risk evaluations to address your unique business needs.
• Compliance Programs & Licensing: Ensure you meet regulatory requirements and navigate money transmitter licensing.
• Independent Audits: Gain actionable insights from impartial compliance reviews.

Partner with Fraxtional to strengthen your business’s resilience and stay ahead of evolving risks. Contact us today to see how we can help you implement a risk-based approach.

End Notes

Integrating a risk-based approach into your risk management strategy helps ensure your business is prepared for whatever challenges come. Focusing on high-priority risks allows you to allocate resources more efficiently, strengthen compliance, and ensure business continuity.

If you’re ready to implement this approach and optimize your compliance and risk management strategy, platforms like Fraxtional offer flexible, scalable solutions to help you easily manage these complex tasks.

Discover how Fraxtional can help you apply a more innovative, risk-based strategy and start making better decisions today.