How resiliency in risk management is the new top priority for banks

As the COVID-19 pandemic starts to ease in some countries, banks are reflecting on the impact of a global health crisis on their institutions. The 11th annual EY/IIF global bank risk management survey shows that many in the industry are pleasantly surprised at how well their organizations have coped. From implementing widespread remote working mandates for employees, to rigorous demands on technology systems previously untested in such extreme circumstances, banks have managed through a prolonged, live stress-test environment to continuously provide customers access to products and services.

Over the last 18 months, resilience across existing and new risk dimensions has become a defining characteristic of long-term success for banks globally. Financial and operational resilience were rigorously tested, but banks’ decade-long effort to build greater and higher quality capital and liquidity put banks in a strong position going into the pandemic. The need for greater technological resilience came about as a result of greatly accelerated moves to transform digitally, as did workforce resilience as banks focus more attention to employee well-being. At the same time, societal and environmental resilience elevated banks’ focus on the need to pay closer attention to diversity and equity in society, as well as the impact of climate change.

However, none of this happened by chance. Substantial investments by banks to make their core businesses more resilient helped many to withstand the worst effects of the pandemic and are driving the continuation of this approach.

It is vital that banks remain resilient. Aside from COVID-19, it is clear banks will have to contend with persistent and dynamic disruption and change not just today, but tomorrow and into the future. Indeed, we are in a period of ongoing disruption and change. One of the biggest risks on risk managers’ minds is climate change. The idea that it is a problem that belongs solely to high-carbon-omitting sectors is over. Instead, 49% of bank chief risk officers (CROs) recognize it as a top risk requiring their utmost attention. Overall, one of the biggest challenges that bank boards and risk teams face is how to manage such risk and help their customers to transition to a net-zero economy.

There are three distinct areas of note that will determine whether banks will succeed in grappling with significant events.

Banking’s got talent?

In a period of sustained change, how banks attract the best talent to their risk functions remains at the forefront of CROs’ priorities. The lure of Big Tech and other digital organizations is something all banks are competing against when trying to coax the best data and analytics talent to their traditional risk functions.

The survey shows 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. Fundamental to this is the need to implement a more agile, innovative working environment. By integrating the risk function with other teams in the bank and exploring more engaging, creative ways to work, banks can do a lot to boost the reputation of the risk team as being a fun and creative space to work in. They can be enablers of innovation and growth, if properly embedded.

Not only do banks need to improve the way they compete for risk management talent, they must do so in the context of a broader, societal demand for more diversity and inclusion in their ranks. Promoting banks as being inclusive, diverse places of work will require a high-level commitment on the part of bank leaders and boards. It is worth noting that even if larger banks get this right, there are still thousands of smaller banks that may struggle to compete for talent. This could result in some banks being left behind, leading to serious risk implications for the sector as a whole or driving more consolidation. Tapping into new pools of talent to acquire and retain the best leadership means the battle for talent will become front and center of banks’ priorities.

If data is the new oil, then what are the risks?

Data is the hottest commodity of any organization today. “Our over-reliance on oil, the results of which we see today, is a useful lesson in how we should use data now and, in the future,” says Mark Watson, EY Americas Financial Services Managing Director and Board Matters Deputy Leader.

During the pandemic, historical correlations underlying risk management models proved inadequate. This resulted in banks leveraging new or alternative sources of data (e.g., mobility data) for risk-management purposes. Overall, almost 50% of banks used new datasets and will continue to do so post-COVID-19, with over a fifth finding such datasets so informative that they are actively expanding what they will use in the future.

However, banks must protect this data and ensure that their sources are ethical. The pandemic may have rapidly increased customers’ reliance on digital services and platforms, but it also reshaped their attitudes toward personal data privacy and altered their behavior. The survey indicates that over 90% of banks recognize this, with the majority expecting additional regulatory standards for data protection to emerge in the months ahead. 

The pandemic also shed light on the broader obstacles banks face with data.

Firstly, banks have a set of known unknowns – CROs recognize that they don’t have all the data they need to make informed decisions and instead are having to make do with what is available. This is particularly relevant for their sustainable finance and environmental, social and governance (ESG) agendas, where specific data isn’t yet available or standardized.

In the case of ESG reporting, banks are increasingly being asked to make public commitments on how they plan to reduce their exposure to carbon-intensive industries. Data is fundamental to helping these banks to clearly understand the complexity of their investment supply chains and how they tie in with the real economy. How banks use and share this data is becoming more and more complex as the parameters around such reporting shift and banks’ exposure becomes more transparent in the public eye.

Secondly, there are a whole host of unknowns, meaning that banks aren’t yet aware of what data they should look for and have on their systems. For banks’ risk functions, this is a growing challenge and this is where hiring the best talent to navigate new environments will be crucial to maintaining strong resilience. It will call for more creative thinking about the many “what ifs” banks now have to consider in an ever-more connected global economy.

Technology accelerates

Technological change that many assumed would take years instead happened in a matter of weeks or months during the pandemic. Increased rates of digital adoption among all ages of customers and the success of remote working are valuable measures of this success. Building on this opportunity and enhancing technological resilience will involve the careful transition to the public cloud and governing the risks associated with the large-scale use of machine learning (ML) and artificial intelligence (AI).

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. The fact that some banks (29%) are now charting a pathway to reduce costs points directly to the increased use of technology and data. Risk and compliance technologies have been maturing in recent years and with more competitive technologies on the market, banks have an opportunity to assess which are the most insightful and cost-effective.

How CROs leverage advanced technology and increased automation will determine whether banks can operate more efficiently and effectively. By investing in these technologies now, banks will be in a better position to deliver decision-relevant insights and adapt to heavier regulatory burdens in the future. Implementing the use of advanced technologies has to be done with care – regulators are increasingly asking questions about how banks manage the risks associated with ML and AI, including guarding against the use of biased data and failing to focus on compliance risks.

Banks have come to realize that it is possible to invest in technology while dedicating the rest of their budgets to staffing and other priorities. Advances in technology still don’t negate the need for top talent – in fact, they place a premium on getting the right kind of talent.

By and large, the risk survey shows that the banking sector is more resilient than perhaps many realized. The industry showed it can do much more, at speed, when it needs to. How resilient it remains will determine whether it can survive new challenges while capturing new opportunities. And the crossover between talent, data and technology will be at the front of organizations’ ability to thrive over the next decade or more.