For the first time since the survey’s inception over a decade ago, climate change tops the list of long-term risks for banks, according to the 11th EY and Institute of International Finance (IIF) bank risk management survey, “Resilient banking: capturing opportunities and managing risks over the long term.” 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.
- Over 90% of CROs view climate change as the top emerging risk in the next five years
- Credit and cybersecurity risks are top issues garnering CRO attention over the next 12 months
More than nine in ten (91%) of surveyed bank Chief Risk Officers (CROs) view climate change as the top emerging risk over the next five years. Only about half (52%) of CROs said the same in 2019. In the near-term, almost half (49%) of CROs now view climate change as a top risk requiring their urgent attention over the next 12 months. In 2019, only 17% 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%).
The survey finds that banks in practice are still maturing in their ability to assess physical and transitional risk exposures: just over half (54%) have a preliminary understanding of their climate change risk exposure and more than a quarter (28%) have a somewhat complete understanding.
In the near-term, banks believe credit risk will be the No. 1 concern over the next 12 months – according to 98% of CROs – amid the global economic recovery from the COVID-19 pandemic. Cybersecurity is perceived to be the second most urgent risk (80%).
Additional key survey findings include:
• Almost one in three (29%) 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 digitization (68%), industry disruption due to new technologies (68%) and obsolescence/legacy systems (62%).
• Based on lessons learned from the COVID-19 pandemic, 93% of CROs expect to see the introduction of new or additional regulatory requirements on operational resilience, and 60% of CROs expect the same on financial resilience.
• CROs expect their banks to further accelerate their digital transformation, including by automating processes (88%), modernizing core technology platforms (66%) and delivering enhanced insights to customers (64%).
Commenting on the findings of the survey, Savvas Pentaris, Partner and Head of Financial Services Sector notes: “The pandemic developed into a prolonged, live stress-test for the banking sector. Banks’ decade-long effort to build greater and higher quality capital and liquidity, combined with substantial investments that made their core businesses more resilient allowed the majority of banks to cope effectively with this challenge. However, banks are now realizing that climate change has evolved into a major risk for the industry, along with other environmental, social and governance matters. Banks need to remain resilient, help their customers to transition to a net-zero economy and attract talent with risk management skills, with emphasis on cybersecurity, data science and climate change.”
For more information, please visit ey.com/bankingrisk