Liquidity Risk, AI, and a Shifting Audit Landscape

By Connor Nurse , Head of US at Broadgate

Liquidity risk is back in the limelight.

It’s been nearly two years since three of the biggest bank collapses in US history sent shockwaves through financial markets, exposing critical vulnerabilities in the risk management system.

Now, as a quiet confidence grows in the banking sector, systemic risks remain, and liquidity concerns have once again found themselves the focus of risk management functions across financial services.

Under the new administration, regulators are likely to cut back on the Basel III requirements (or even scrap them completely), potentially leading to riskier lending practices and asset holdings in the process.

From stress testing scenarios to buffers and contingency plans, banking resilience demands a proactive approach to liquidity risk management.

Between the convergence of technology and financial services, a fast-changing risk environment, and growing geopolitical tumult, agile business functions will be the key to sustainable success in the year ahead.

Broadgate’s recruitment consultants explore what it means for the talent market in more detail below.

Liquidity in the Third Line

We’re seeing a growing emphasis on liquidity risk in the third line of audit, an especially busy place to be right now.

The intricacies of liquidity risk – rising interest rates, slowing fiscal growth, cybersecurity, deregulation – are multiplying. The shifting dynamics are creating a demand for tech-savvy talent who can manage operational challenges across a growing threat surface.

• Job growth looks positive for internal audit, with the BLS predicting a 6% growth between 2023 and 2033.
• According to our LinkedIn data, audit roles in financial services have grown by 9% in the last 12 months.
• Despite the prospect of reduced climate-focused reporting regulations, ESG remains a focus for today’s audit roles. ESG is gaining global momentum, and practical risks will remain even if they no longer fall under regulatory scope.
• Hiring managers are prioritizing adaptability in internal audit candidates, given the push for greater agility in a fast-moving environment.
• Talent pools are looking sparse. Financial services are facing a shortage of qualified candidates as the audit space evolves at warp speed. With strong networks and easy access to passive candidate pools, Specialised staffing agencies are well-placed to bridge the gaps.
• We’re seeing a global spike in demand for audit roles as firms look to fortify their risk management functions ahead of broad regulatory change.

?The AI talent scramble

North American banks are leading the charge in the AI talent scramble, with five of the top 10 contenders on the 2024 Evident AI index hailing from the US (Capital One, Citigroup, JPMorgan Chase, Morgan Stanley, and Wells Fargo).

The nature of audit roles must evolve in tandem with the uptake of AI implementation. For today’s candidates, working alongside sophisticated data analytics platforms is almost a given.

AI tools will likely start seeing more use in stress testing, although progress is lagging. According to research from Capgemini, only 6% of retail banks have an enterprise-wide roadmap for using generative AI at scale.

The potential to lean on this tech to help solve liquidity risks is real. As Vincent Mortier writes in the Financial Times, ‘Liquidity is no longer intractable. With today’s big data tools, liquidity conditions can be anticipated, and actively managed.’

• Hiring managers are struggling to target candidates with the right balance of IT expertise and audit fundamentals. The fix requires greater flexibility in role requirements and a commitment to upskilling.
• As automation picks up, auditors will have the opportunity to act in a more strategic capacity. When it comes to hiring candidates, this means focusing on those with strong soft skills and an ability to translate complex technical concepts into accessible business reports.
• It’s difficult to predict what the ‘typical’ audit function will look like in a few years. What is clear, is that targeting agile, adaptable candidates is crucial.
• AI literacy is a big operational focus this year. Auditors must be able to effectively communicate the implications of new systems to both internal functions and regulators.

Emerging Tech and Liquidity Risk

Thanks to the emergence of GenAI, financial institutes now have an unprecedented ability to assess and mitigate liquidity risks in real time. Whether or not the technology takes off (in a space that’s been historically slow to adopt new tech) in the next year remains to be seen. Whatever the case, it’s no longer a question of if.

With a robust AI infrastructure and the right talent onboard, audit teams will benefit from:

• Real-Time Scenario Analysis – Simulating multiple stress-testing scenarios can provide deeper insight into how variables impact liquidity positions, including sudden market downturns and interest rate hikes. This agility enables more precise decision-making in volatile environments, just like the one we’re currently experiencing.
• Regulatory Reporting – Audit teams can work alongside GenAI to develop regulatory reports, reducing the room for error in the process.
• Synthetic data – Through the generation of synthetic data, audit teams can overcome the real-world limitations of datasets, like a lack of historical data on extreme market events. Testing liquidity models on these synthetic datasets can help identify potential vulnerabilities.
• Automated Testing Procedures – Consistent, automated testing procedures free up audit professionals to focus on complex value-add tasks at the strategic level.
• Enhanced Pattern Detection – GenAI systems can be used to uncover subtle patterns, enhancing the ability of audit teams to predict liquidity bottlenecks.

The capacity scalable and sustainable AI-enabled audit is there, provided firms can overcome familiar transformation challenges, including cultural resistance and a lack of access to talent.

Working alongside our consulting division (Trinnovo Consulting) and our sister brands (Trust in SODA and DeepRec.ai), Broadgate is well-equipped to support the growth of financial services as the gap between tech and financial services shrinks.

How are planning to augment your workforce in the year ahead?

Contact me to learn more about our leading recruitment and advisory services: [email protected].

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