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Ernst & Young LLP (EY US) and Institute of International Finance (IIF) have released findings from their 10th Annual EY/IIF Survey. The survey, titled, "An endurance course: surviving and thriving through 10 major risks over the next decade," highlights 10 key risk factors for banks over the next 10 years.       

According to a statement released today, the advisory firm and the global association of the financial industry said the risks, which started primarily as financial, have evolved into today's nonfinancial risks, such as cybersecurity, geopolitics and climate change.

"In the next decade, banks will face 10 major risks that test the ability to survive and thrive," said Mark Watson, Managing Director, Ernst & Young LLP. Chief among the risks impacting banks globally is the intense growing conversation around a potential new economic downturn.

The 10 key risk factors, according to the survey, are 1) Weathering the likely financial downturn; 2) Operating in an ever-expanding ecosystem; 3) Protecting privacy to maintain trust; 4) Fighting a cyber war in banks and across the system; 5) Navigating the inevitable industry transition to cloud; 6) Industrializing data analytics across the business in a controlled manner; 7) Delivering services to customers, clients and markets without disruption; 8) Adapting to the effects of fast-shifting geopolitics on banks and their customers; 9) Addressing the impact of climate change on banks and society; and 10) Meeting emerging customer demands for customized, aggregated lifetime offerings.

According to the report, initially the primary objectives for banks managing financial risks focused on capital and liquidity. But as governance and regulation models improved, banks have become healthier than they were pre-crisis and, in turn, have been able to de-risk and de-leverage their balance sheets. In the second half of the decade, nonfinancial risks, such as cybersecurity, data, and conduct and culture, then came to the fore.

Aside from remaining financially strong, the report says banks will have to manage a set of demanding, complicated and significant nonfinancial risks in the future. "Banks now face an array of difficult issues — climate change, privacy, systemic cyber threats and more. Each risk by itself will be challenging, but together they will test banks' long-term viability," said Watson. “A financial downturn of some kind seems likely to occur in the next few months or years."

The survey findings show that over half (52%) of banks view environmental and climate change matters as a key emerging risk over the next five years, up from just over a third (37%) a year ago. Hence, four in five (79%) banks have incorporated climate change into their risk management approach. Most (59%) have built it into their scanning of emerging risks, while two in five (41%) have already adopted policies for impacted businesses.

The survey also shows that one in four banks (23%) rank privacy as a top risk in the next 12 months, and one in two (53%) view privacy as a key emerging risk over the next five years. Furthermore, four in five banks now believe a system-wide, industry-level attack or material event is likely in the next five years — almost a third (29%) view that as very likely. Generally, the report says risk professionals are most concerned about adapting their risk capabilities (60%) and culture (58%) to the industry-wide transition to the cloud.

Risk professionals, regulators and policymakers are very focused on the risks of scaling up artificial intelligence and machine learning technologies. Banks' risk teams already see challenges in capturing new risks (64%) and getting the right talent to manage the risks (59%). They also see a lack of historical data showing how these models act under different market conditions (54%) and uncertain regulatory expectations (47%) as additional challenges.

According to the survey, 60 per cent of banks view geopolitical risks as a major risk over the next five years. The top geopolitical risks that will impact banks over the next decade are escalating cyber warfare and the China-US relations (both tied at 47%).

Mark Watson, who is also EY Americas Financial Services Organization Board Matters Deputy Leader, said banks are in a far better position today than a decade ago in the management and governance of risks. He said, "Banks still have significant opportunities to simplify their risk management approach and get to a truly integrated view of risk across the firm. It is important for banks to become much more efficient in managing risks, using innovative new approaches and improved data analytics."

Andres Portilla, Managing Director for Regulatory Affairs at the IFF, echoed Watson. “Globally, banks have greatly strengthened their risk management over the past decade, and that has made the industry safer and more resilient," said Portilla. However, Watson said, "Chief risk officers and their teams will have to demonstrate they can guide the banks in the management of risks and exposures well before banks have to access their capital and liquidity backstops. This will test the stature and influence of risk professionals across all banks."

To conduct the survey, EY and the IIF surveyed 115 financial institutions, including top banks, in 43 countries between June 2019 through September 2019. The two organisations interviewed chief risk officers or other senior risk executives of the financial institutions, spanning Asia-Pacific, Europe, the Middle East and Africa, Latin America, and North America.