How banks can adjust to a landscape altered by the war in Ukraine

When global events move quickly and plans change, it is important to focus on the long-term implications for your business.

In brief

• Greater visibility of your customers and staff is key to understanding risk and identifying exposure.
• Operational resilience is an important indicator of long-term success.
• Regulation will target cybersecurity, cryptocurrencies and sustainable finance.

The war in Ukraine has highlighted the importance of global banks having robust scenario planning and risk management strategies in place. Alongside the ongoing climate crisis and a global pandemic, the ability of organizations to deliver on their current and future business objectives is being thoroughly tested.

When you add in factors specific to the financial services sector, such as increased regulation to combat economic crime and manage cryptocurrencies, the risk landscape remains complex and continues to change.

Indeed, 87% of respondents to the EY Global Board Risk Survey said market disruptions have become increasingly frequent, and a further 83% said they had become increasingly impactful.

In the first half of 2022, banks have been focusing on ensuring the safety of staff and identifying key exposures. But to meet their strategic goals, they need to address long-term issues as well. Here are six areas banks need to focus on:

1. Understand and support your customers

Individuals and businesses are facing up to a period of volatility that could have major long-term consequences. Driven by geopolitical issues, the macroeconomic picture has worsened since the start of the year – the Organisation for Economic Co-operation and Development (OECD) estimates global growth will be more than 1 percentage point lower than previously forecast, and inflation could rise by a further 2.5 percentage points on aggregate across the world.

Faced with rising prices and interest rates, more than one-third of respondents to the EY Future Consumer Index said they planned to buy fewer physical goods. Companies need to respond to this changing dynamic by supporting clients while navigating their own rising cost base, supply chain disruption and evolving business models.

In response, banks should revisit economic scenarios to help ensure they account for rises in commodity and energy prices, inflation, and interest rates. Particular attention should be paid to those customers who are most vulnerable to these changes as well as those who may be affected by sanctions. Gaining greater visibility of corporate clients’ supply chains and trading activities, for example, will enable banks to determine their exposure more accurately.

The flip side is that new modeling should also indicate where demand is evolving. As the consumer buy-now-pay-later market grows, for example, can you help your retail customers to participate while helping to ensure they don’t become indebted? As regulators increasingly focus on preventing money laundering, can you help your corporate clients mitigate the risks by digitizing trade finance controls? As always, staying close to your customers and removing pain points during difficult times will stand you in good stead when more prosperous times return.

2. Stress-test your workforce resilience

Global banks mean global workforces. This means banks can tap into a wider pool of talent, build a more diverse workforce, and, thanks to technology, work closely with third-party providers in a range of locations.

But the wider you cast your net in search of talent, the more likely you are to encounter potential threats. Banks should reassess how geopolitical events might impact employees wherever they reside. Should you look to reduce the concentration of employees in risky geographies, for example? Do you have the capability to relocate staff during a crisis? One way to test your resilience in this area is to conduct disaster recovery exercises to simulate the loss of a particular location.         

Trusted third parties could be used more widely to mitigate potential disruption. However, when going down this route, it is important to check that the resilience of any external providers matches that of your own business — the adage that you are only as strong as your weakest link applies here.

More broadly, banks should assess whether their workforce mobility strategies need amending to help ensure they have the right people in the right places. Strategic workforce planning can help – using the right tools, teams, and data can help you build a clearer picture of your workforce, identify gaps, and help ensure changes are executed. Any changes should factor in emerging trends, such as hybrid working, and helping to ensure that they are focused on driving long-term value, notably customer-centricity.

3. Ensure your operations are agile and secure

Operational resilience is key to surviving and thriving when shocks — expected or unexpected — arrive. In light of recent events, however, banks should have frank discussions about whether there is an appetite to continue to operate in countries where geopolitical risk is heightened. Ultimately, the question that needs answering is whether the long-term benefits outweigh the costs.

If the answer is “yes,” companies need to help ensure their operations are as resilient as possible. In the event of an emergency, is your customer service function set up to deal with an influx of requests, for example? If you have an investment arm, do you have plans in place to stop trading or terminate trades with little or no lead time?

Retail banks may need to refine their cash supply chains to minimize disruption, rationalize their product portfolios due to regulatory pressures, or onshore activities from regions where risks are deemed too high. Whatever your specialism, the technology you rely on needs to be stress-tested to ensure, for example, that data can be accessed from wherever it resides and whenever you need it.

As many banks found out when the COVID-19 pandemic struck, operational transformation is no longer an option — it’s a necessity. Recent geopolitical risks have only reinforced the argument that agility, security and resilience are the indicators against which to benchmark your operations.

4. Stay on top of regulations and sanctions

The start of 2022 has shown how quickly sanctions can be imposed on a country or regime that defies international norms. Long-term planning is tricky in this scenario, as it can be difficult to ascertain how long sanctions will remain in place or whether new ones will arrive to replace them.

Consequently, banks should think carefully about the time and resources they may need to allocate to managing sanctions, including compliance and potential reciprocation. Know Your Customer (KYC) and anti-money laundering (AML) processes should be front of mind — review screening and control mechanisms, data and document access and storage procedures to ensure you can act quickly and accurately when required.

Engaging more closely with your peers can be beneficial. As well as helping to benchmark how the industry is responding, greater communication will help inform dialogue with regulators. This is important, given temporary sanctions can lead to permanent regulatory change.

The banking industry is already facing regulatory fragmentation due to growing US-China tensions, the EU’s push for strategic autonomy and rising nationalism and protectionism in many markets. This complexity only adds to a growing list of areas that regulators are focusing on: cryptocurrencies, cybersecurity and ESG criteria, to name just three.