Five ways risks are evolving for banks

Risk management is at the core of what banks do. Banks manage a broad spectrum of risks: maturity transformation, credit, data security, regulatory, fraud, legal risk, and so on. But in the wake of the pandemic, which risks are banking leaders more focused on, and what are their emerging priorities? The 11th annual EY/IIF global bank risk management survey of chief risk officers (CROs) and board members helps answer this question. Five highlights:

Credit risk tops the agenda. Unsurprisingly, the sheer scale, depth and prolonged nature of the COVID-19-induced economic shock means managing credit risk is the top priority for CROs and boards over the next 12 months. This is despite the fact that banks are better capitalised than ever. At present, CROs’ main concerns focus on banks’ ability to deploy loss-mitigation strategies for customers at a large scale and the depth of their workout teams managing commercial clients. They are also anxious about the reaction of shareholders and analysts to credit challenges.

Anticipating a new regulatory wave focused on resilience. Over the last 18 months, resilience has become a defining characteristic for banks’ success globally. Most banks have coped well during the crisis, but there is now an opportunity to innovate for better resilience and future growth. While bank executives are generally confident about their organisations’ resilience, more than 90% still cite workforce resilience, and more than 80% cite operational resilience as an increased priority. Most banks (93%) expect regulators to impose additional or new operational resilience requirements in the coming years, including a change to data protection, third parties and end-to-end testing. Further, two-thirds of bank CROs expect new or additional regulatory requirements targeting financial resilience, post-pandemic. Such changes are expected mainly in the areas of stress testing and risk reporting.

Bringing down the cost of risk management. In an era of tight margins, cost is a key lever to profitability. Yet, despite that fact, two-thirds of banks (69%) expect the total cost of risk management to rise, with over a quarter (27%) expecting that increase to be over 15%. There is a significant minority (22%) who see a pathway to decreasing the cost of risk management. Data, technology and innovation will be crucial to achieving efficient risk management. Over three-quarters (76%) of banks are automating manual processes, considering ways to enhance risk data (56%) or harmonising control frameworks (36%). However, there are countervailing needs that push up the cost of controls. These controls are destined to manage risks associated with an accelerated technology transformation (67%), enhanced cybersecurity for remote working (56%) and enhanced or new regulations or supervisory expectations (26%).

Sustaining organisational culture. Concerns over hybrid working models have evolved from whether it was technically or legally possible for certain teams to work from home, to whether clients would accept it. After 18 months of most people working from home, the question of how it impacts organisational culture that has come to the fore. About three-quarters of CROs are worried about the erosion of the corporate and employee community with reduced face-to-face interaction. In response, executives are starting to explore ways to build a more positive culture and ways of working. This includes establishing an open environment that encourages employees to proactively identify and escalate risks, developing a risk culture that supports business strategy and growth, and cultivating transformative leaders. Taking a disciplined approach to defining, implementing and reinforcing corporate culture will be a defining success factor as we all work in a hybrid working model.

Accelerating digital transformation. The pandemic has strengthened the focus on digital transformation for leaders across banks; CROs are no different. At the top of the priority list for CROs is process automation to drive efficiency and effectiveness. Accelerating the transformation of core IT platforms as well as the move to the public cloud are also critical. Bank CROs point to a myriad of reasons why digital transformation is being accelerated. But, chief among them (for 60%) is supporting a more efficient operating model. Meeting customer expectations, enhancing their experience and addressing their differing preferences are also drivers of change.

The last global (financial) crisis had lasting repercussions for the way banks manage risks. As we start to emerge from this very different crisis, CROs have an opportunity to evolve and innovate the way the banking sector assesses and addresses risk.

You can learn more about the issues I have highlighted, including the top emerging risks (with climate change jumping to the top position) and the risk skills needed for the future, in the 11th annual EY/IIF global bank risk management survey.

Disclaimer: The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.