According to the latest bank risk management survey conducted by Ernst & Young (EY) and the Institute of International Finance (IIF), cybersecurity has now risen to the top of the list of near-term risks for banks throughout the world amid unprecedented levels of global volatility and uncertainty.
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The 12th edition of this joint report is based on survey data collated from 88 banks across 30 countries, which includes the Philippines, and highlights the issues that Chief Risk Officers (CROs) view as the most pressing for their organizations now and in the future.
According to the report, today’s CROs face increased complexity caused by overlapping and correlated risks, nearly all of which seem to be increasing in urgency. In the short term, three out of four CROs identified cybersecurity risk as their top concern over the next 12 months (72%), edging out credit risk (59%).
“CROs are no longer juggling a tiered waterfall of risk, but a torrent of interwoven complexities that have rapidly evolved in a matter of months. The role of the CRO is in the spotlight; and, with geopolitical risk underpinning everything else on their agenda, they will need to find new and innovative ways to address competing demands. It is arguably one of the hardest jobs in the banking c-suite, facing new and hidden risks – particularly from increasingly sophisticated cyber-attacks, that will put increasing pressure on an already volatile environment,” stated Jan Bellens, EY Global Banking & Capital Markets Sector Leader, in a press release.
Credit and geopolitical risks are acute
Credit risk overwhelmingly dominated global CROs’ attention (98%) in last year’s survey, but this year the worries are most pronounced among European CROs. Sixty-nine percent of European banking CROs view credit risk as the top risk-management issue relative to 59% globally. In addition, more than three-fourths (77%) of European CROs view it as a risk that requires the attention of the board of directors, relative to 45% globally.
Over the past year, rising geopolitical risk has added uncertainty to an already turbulent economic recovery, and has recorded the biggest rise year-on-year relative to the previous survey. The impact of the war in Ukraine from February 2022 has played out most strongly in the risk agenda of Europe’s banking CROs, with 62% of survey respondents expecting geopolitical factors to demand greater levels of their attention over the coming year, relative to 28% globally.
“European banking CROs, board members, and regulators are facing a very different outlook relative to just 12 months ago, so it’s no surprise that risk agendas have moved markedly. While climate risk remains a priority area, the war in Ukraine has precipitated a period of elevated market volatility and systemic inflation that continues to challenge Europe’s financial stability and confidence, and European CROs have understandably sharpened their focus on credit and geopolitical risk as a result,” added Omar Ali, Ernst & Young EMEIA Area Managing Partner for Financial Services.
Market volatility from geopolitical risk is a major concern
Geopolitical risks play out differently by region, with almost three-quarters (70%) of North American CROs concerned about cyber warfare between nation-states — substantially more than their peers in Europe (46%). For CROs in the Asia-Pacific region, more than three quarters (78%) are focused on China’s changing global role, and more than two-thirds (67%) say they are most worried about ongoing changes within the global trade environment. Despite the regional differences, 59% of CROs agreed that market volatility from geopolitical risk would have a ‘major’ or ‘moderate-to-high’ impact on exposure to market risks.
Mitigating and understanding risk exposures
According to the survey, CROs are not confident in their ability to defend against cyberattacks, with 58% citing their organization’s inability to manage cybersecurity risks as their top strategic threat over the next three years. The number of CROs concerned about increased cyber-attacks manifesting from geopolitical risk jumped from 39% last year to 61% this year.
On climate risk, which topped the list of emerging concerns for CROs last year, 51% of organizations stated they only had a basic understanding of their climate risk exposure. The survey also highlights that only 37% of CROs see environmental risk as a top-five issue that will demand CRO attention during the next three years, a drop from 49% in last year’s research. European banks are leading the way in their understanding of both climate-change physical risks and transition risks, and 69% of European banks report either a complete or somewhat complete understanding, versus 39% globally.
Nearly three-quarters (71%) of global CROs expect climate risk to be the most important concern for regulators over the next five years, far ahead of digitization (37%), data integrity (36%), and geopolitical risk (35%). Notably, a majority of CROs surveyed say they will prioritize risk from new technologies and digitization to a greater extent than regulators, who they expect to focus on data privacy and security.
“It’s clear that there’s an interconnectedness between the top risks identified by CROs this year – cybersecurity, geopolitical, and credit –and their underpinning networks. Ongoing economic volatility has only fueled the concern that CROs will be navigating an increasingly complex risk landscape over the next 12 months,” explained Andrés Portilla, Managing Director for Regulatory Affairs at the IIF.
Additional notable findings from the survey include:
- Cyber controls are the top priority for boosting operational resilience (65%), followed by technology capacity (33%) and third-party dependencies (30%). Given the expanding need for more robust controls, 85% of respondents noted they expect the cost of controls to go up in the next three years.
- Given the recent challenges faced by some large crypto exchanges, CROs are operating a more conservative model on digital assets. Nearly half (49%) of banks surveyed said they are still defining their digital asset strategies.
- CROs are also very concerned about talent and culture risks, with 57% of them noting that talent is one of the most significant long-term risks facing the banking industry.
- In order to attract and retain the talent to build a high-performing risk management function and meet the changing needs of the risk management function, the vast majority of CROs (94%) say they need some or many new skills and resources.
More information about the report is available here.