EDITOR NOTE: The 11th annual EY/Institute of International Finance (IIF) global bank risk management survey lays out the state of the banking industry around the world. The 2021 version gives us some interesting insights into where Big Banking is at these days. Respondents said that “credit risk and cyber security risk are the topmost issues over the next 12 months.” This is unsurprising as the lack of economic recovery from the pandemic is top of everyone’s minds these days, and issues around cyberattacks and data security on traditional banks should frighten anyone who uses the traditional banking system. The most fascinating nugget, though, is that Big Banks identified the biggest emerging risk as climate change. This clearly signifies that banks are all-in on the Left’s agenda to spend whatever it takes and suffer whatever economic consequences need to be suffered in the name of stopping climate change. This sentiment is another unsettling proposition for our global financial future.
While credit risk and cyber security risk are the topmost issues over the next 12 months for chief risk officers (CROs), the importance of climate change has surged up their agenda and now tops the list of emerging risks over the next five years.
According to the 11th annual EY/Institute of International Finance (IIF) global bank risk management survey, polling 88 banks from 33 countries, almost half of responding bank CROs recognise climate change as a top risk in the coming year, compared to 17% that felt this way 18 months ago. More than nine in 10 CROs view climate change as the most important emerging risk.
During a recent IIF webinar discussing the results, Chris Woolard, chair of EY Global Regulatory Network, outlined the global push being made by governments and countries on environmental, social and governance (ESG) issues, which present significant opportunities for the financial services industry. “[However,] we can see from the survey that CROs are concerned that firms haven't made a full evaluation of the opportunities for them commercially, in terms of being part of this wider ESG revolution,” says Mr Woolard, who joined EY in February from the UK’s Financial Conduct Authority where he was interim CEO.
From a CRO perspective, seven of the other top 10 emerging risks over the next five years relate to data and technology, including: data integrity; data privacy; IT obsolescence and legacy systems; the pace and scale of digitisation and industry disruption from new technology; and the use of artificial intelligence and machine learning.
The survey found that almost 50% of banks used new datasets and will continue to do so post-Covid-19. However, it also found that more than 90% of banks recognise that they need protect this data and ensure that their sources are ethical, with the majority expecting additional regulatory standards for data protection to emerge in the months ahead.
Highlighting the potential opportunity of new technologies during the IIF webinar, Sonja Koerner, EY global banking and capital markets risk, said, “The deployment of new and improved technology will fundamentally change the way risks will be managed and controlled. [New technologies] will change the risk operating model and, if deployed appropriately, will significantly increase robustness, [improve] timeliness and reduce cost of control.”
This technology transformation will also have a fundamental impact on the workforce, specifically around required skills, according to Ms Koerner. Attracting the best talent to their risk functions remains at the forefront of CROs’ priorities. The survey found that nine out of 10 banks expect to broaden the risk skillsets within their institutions, with a growing focus on the need for risk professionals to better understand how to leverage data, for example.
“As the industry goes through the transformation, the CRO function increasingly needs employees that are not only deep subject matter experts, which typical risk employees almost always are, but are also agile and quick to adapt,” she said. “Attracting, developing and retaining the right talent will be at least as critical as delivery against the technology agenda.”
However, this great transformation is happening at a time when budgets are under pressure. “When previously asked about future budgets in past EY/IIF risk surveys, the common response was that the cost of risk management was going up. Few, if any, banks had found a way to maintain or enhance risk management while simultaneously reducing costs,” according to the report. Yet almost one on three are now charting a pathway to reduce costs, which points directly to the increased use of technology and data.
“The need to reduce cost has now also reached the risk function, and technology changes and automation will be key to realise those savings,” said Ms Koerner. “Unfortunately, investment is needed to deploy new technologies and there is cost associated with enhancing data and implementing appropriate controls. So, indeed, it is no surprise that the survey responses alluded to budgetary constraints and the scale of change required as major constraints to digital transformation for the CRO function.”
A more general development from the previous survey, according to Mark Watson, EY Americas financial services managing director and board matters deputy leader, is that resilience is a much broader concept for CROs, extending beyond financial and operational resilience to include environmental, technology, workforce and societal resilience. “It’s the next thing that must be addressed over the next decade in a much more integrated way. Managing all of those new risk dimensions also presents opportunities and CROs have a major role to play as dynamic partners in that journey,” he said during the webinar.
Originally posted on The Banker