…..over 90% CROs see climate change as top emerging risk in next five years
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.
More than nine in 10 (91 per cent) surveyed bank chief risk officers (CROs) view climate change as the top emerging risk over the next five years. Only about half (52 per cent) of CROs said the same in 2019. In the near-term, almost half (49 per cent) 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 ).
Benson Uwheru, Partner, Banking & Capital Markets Sector Leader, EY West Africa says:
“In the past year, we saw climate change rapidly ascend to the top of banks’ long-term risk agendas for the first time. Bank boards and senior management must remain resilient across a broader set of dimensions as the world adapts to a post COVID-19 world, and it’s clear that now includes climate-related risks, as well as other environmental, social and governance matters.”
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.
Anthony Oputa, EY Regional Managing Partner for West Africa, adds: “Beyond the issues around technology and data and the pace and breadth from digitization driving the entire business processes, business leaders and decision makers now see climate change as one of the most critical and defining issues of our time that requires urgent attention. Financial institutions, which seem to be the most affected, have the responsibility to consider and treat every climate-related risk, and all other environmental, social and governance issues with all seriousness. The time to act is now amid the global economic recovery from the COVID-19 pandemic.”
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%).
Benson Uwheru further says that “While cybersecurity has long been the leading immediate concern for CROs, the COVID-19 pandemic changed the game. The breadth and depth of the pandemic’s shock to the global economy has brought credit concerns to the forefront for banks over the next 12 months.”
Other key survey findings include:
- • Almost one in three (29%) of 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%).
EY, in conjunction with the IIF, surveyed IIF member firms and other top banks in each region globally (including a small number of material subsidiaries that are top-five banks in their home countries) from November 2020 through January 2021. Participating banks’ CROs or other senior risk executives were interviewed, completed a survey, or both.
In total, 88 IIF member firms across 33 countries participated. Regionally, those banks were headquartered in Asia-Pacific (18%), Europe (24%), Middle East and Africa (13%), Latin America (16%) and North America (29%). Of those, 19% are globally systemically important banks (SIFIs) and 61% have been designated as systemically important domestically. Data relates to the 62 banks that completed the quantitative survey, and the narrative includes insights gleaned from qualitative interviews with some of those and other banks.
