The next decade could be harder for industry due to 10 major risk factors
The global banking industry is no stranger to managing risks but a new report says that challenge is set to become tougher.
There are 10 major risk factors for banks according to the survey of chief risk officers (CROs) and other risk executives across the world, conducted by Ernst & Young (EY) and the Institute of International Finance (IIF).
The risks mostly began as financial but have grown and evolved to include several non-financial risks such as cybersecurity and geopolitics; and this could add extra risk for investors that hold large volume of banking stocks.
“Banks are in a far better position today than a decade ago in the management and governance of risks,” said Mark Watson, Managing Director, Ernst & Young LLP, and EY Americas Financial Services Organization Board Matters Deputy Leader. “Banks still have significant opportunities to simplify their risk management approach and get to a truly integrated view of risk across the firm. It is important for banks to become much more efficient in managing risks, using innovative new approaches and improved data analytics.”
However, he added that the 10 major risk factors identified in the report will test banks’ ability to thrive and survive.
The greater risk seen by CROs and other respondents is an economic downturn, central to many conversations in recent months.
“A financial downturn of some kind seems likely to occur in the next few months or years,” said Mr. Watson. “Chief risk officers and their teams will have to demonstrate they can guide the bank in the management of risks and exposures well before banks have to access their capital and liquidity backstops. This will test the stature and influence of risk professionals across all banks.”
banks will have to manage a set of demanding, complicated and significant nonfinancial risks in the future. “Banks now face an array of difficult issues – climate change, privacy, systemic cyber threats, and more. Each risk by itself will be challenging, but together they will test banks’ long-term viability,” said Watson.
10 major risk factors
The 10 major risk factors are:
- Weathering the likely financial downturn
- Operating in an ever-expanding ecosystem
- Protecting privacy to maintain trust
- Fighting a cyber war in banks and across the system
- Navigating the inevitable industry transition to cloud
- Industrializing data analytics across the business in a controlled manner
- Delivering services to customers, clients and markets without disruption
- Adapting to the effects of fast-shifting (geo)politics on banks and their customers
- Addressing the impact of climate change on banks and society
- Meeting emerging customer demands for customized, aggregated lifetime offerings
“Globally, banks have greatly strengthened their risk management over the past decade, and that has made the industry safer and more resilient,” said Andres Portilla, Managing Director for Regulatory Affairs, at the IIF. “Banks now have to focus on a number of major risks that, if anything, will become even more important over the next decade, including cybersecurity, operational resilience, and ethical use and privacy of data.”
Privacy, climate change, cyber
Among the major concerns for the banking industry are the currently increasing focus on privacy, climate change, and cybersecurity.
The survey found that 23% of banks rank privacy as a top risk in the next 12 months, and 53% view privacy as a key emerging risk over the next five years.
Over half (52%) of banks view environmental and climate change matters as a key emerging risk over the next five years, up from just over a third (37%) a year ago.
Unsurprisingly then, 79% of banks have incorporated climate change into their risk management approach with 59% having built it into their scanning of emerging risks, while 41% have already adopted policies for impacted businesses.
Four in five banks now believe a systemwide industry-level attack or material event is likely in the next five years - almost a third (29%) view that as very likely.
Six in 10 banks view geopolitical risks as a major risk over the next five years with escalating cyber warfare and the China-US relationship tied (47%) as the top geopolitical risk that will impact banks.
