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Pandemic drives new risk profiles for banks

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The global pandemic has highlighted climate change together with diversity issues such as inequity and social injustice – issues that also are increasingly being considered by executives and directors of the world’s modern banks as an evolving concern.

But bankers are also facing credit risks and cybersecurity challenges in the immediate future, a new report has determined.

COVID-19 demonstrated how suddenly risks and priorities can change – and therefore, how crucial for such institutions that they have flexible and dynamic risk management frameworks in place, according to president and chief executive officer of Institute of International Finance (IIF) Tim Adams.

This emerged from the 11th annual EY/IIF global bank risk management survey, ‘Resilient banking: capturing opportunities and managing risks over the long term’.

While credit and cybersecurity risks are keeping bank managers up at night for the near term, climate change is on their mind for the long-term.

In fact, banks regard climate change as their top long-term risk, according to the poll.

The survey of 88 financial institutions across 33 countries provides a window into the changes in risk management seen globally during the past decade, and the major risks anticipated over the next 10 years.

Risk issues garnering the attention of the banker’s chief risk officers (CRO) over the next 12 months? Credit Risk 98 per cent; cybersecurity 80 per cent; climate change 49 per cent.

While climate change topped the long-term risk list for the first time in the 11th iteration of the survey, resilience across all aspects of banking featured prominently.

More than nine in ten (91 per cent) of the surveyed bank chief risk officers (CROs) view climate change as the top emerging risk over the next five years. Only about half (52 per cent) of CROs said the same in 2019.

In the near-term, almost half (49 per cent) of CROs now view climate change as a top risk requiring their urgent attention over the next 12 months. In 2019, only 17 per cent took that view.

Beyond climate change, the most important emerging risk according to CRO respondents is the length and depth of the global economic recovery (83 per cent).

Mike Mannisto, EY’s banking & capital markets leader for the region that includes Bermuda, British Virgin Islands, Cayman Islands and the Bahamas said: “The survey’s findings suggest that resilience has taken on a broader meaning for bank boards and leadership during the COVID-19 pandemic.”

An EY Cayman partner, he added: “The rise of climate change to the top of risk agendas reflects banks’ increasing focus on environmental and societal resilience. Accelerated digital transformation has heightened the need for technological resilience, while growing attention on employee well-being during the pandemic speaks to the importance of workforce resilience.”

The survey finds that banks in practice are still maturing in their ability to assess physical and transitional risk exposures: just over half (54 per cent) have a preliminary understanding of their climate change risk exposure, and more than a quarter (28 per cent), have a somewhat complete understanding.

Meanwhile, EY Bermuda Partner and Regional Consulting Leader Chris Maiato said: “COVID-19 kick-started technology transformation leading management to accelerate digital transformation.”

CROs expect their banks to further accelerate digital transformation, including automating processes (88 per cent), modernising core technology platforms (66 per cent) and delivering enhanced insights to customers (64 per cent).

The Bermuda partner added: “By investing in these technologies sooner rather than later, banks will be in a better position to deliver solutions and adapt to heavier regulatory rules in the future.”

In the near-term, banks believe credit risk will be the No. 1 concern over the next 12 months – according to 98 per cent of CROs – amid the global economic recovery from the COVID-19 pandemic.

Cybersecurity is perceived to be the second most urgent risk (80 per cent).

Additional key survey findings include:

• Almost one in three (29 per cent) of banks now believe they can manage down costs of controls over the next three years by using data and technology to improve risk management.

• Seven of the top 10 emerging risks according to CROs relate to technology and data, including the pace and breadth of change from digitisation (68 per cent), industry disruption due to new technologies (68 per cent) and obsolescence/legacy systems (62 per cent).

• Based on lessons learnt from the COVID-19 pandemic, 93 per cent of CROs expect to see the introduction of new or additional regulatory requirements on operational resilience, and 60 per cent of CROs expect the same on financial resilience.

Chris Maiato, EY Bermuda Partner and Regional Consulting Leader
Mike Mannisto, Partner at EY Cayman and Banking & Capital Markets Leader, EY Region of the Bahamas, Bermuda, British Virgin Islands and Cayman Islands,

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Published August 30, 2021 at 6:44 pm (Updated August 30, 2021 at 6:44 pm)

Pandemic drives new risk profiles for banks

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