2023 delivered a raft of notable bank failures, the largest since the 2008 financial crisis. Silicon Valley Bank and others succumbed to collapse, triggering widespread reverberations and heightened market uncertainty.
We also saw a tsunami of AI innovation, expanding fraud and financial crimes, workforce transformation and climate risk. And let’s not forget the continuing regulatory change and pressure.
These unsettling events and trends have thrust risk management into the spotlight, demonstrating the need for increased focus and investment in risk management transformation and modernization. With 2024 poised to continue delivering on the trends of 2023, financial institutions stand at the intersection of challenges and opportunities and navigating the complexities of the current banking world requires a multifaceted strategy.
Assessing the probability of default
Addressing continuing bank failures, Donald Van Deventer, Managing Director of Risk Research and Quantitative Solutions at SAS, predicts, “2024 will bring more bank failures, forcing banks to recognize the most important question in risk management: ‘What is our own probability of default?’ And they will deploy tools and technologies to answer that existential question.”
A recent survey of risk professionals by Celent revealed that 80% of firms are eyeing significant improvements to their asset liability management (ALM) functions. Yet less than a third said their firms have fully automated data sharing between ALM and other risk or business functions. It’s time to change that.”
Aligning with the 2024 regulatory agenda
The 2024 global regulatory agenda will continue emphasizing consumer protections due to technological advancements like generative AI. Deloitte’s 2024 Banking Regulatory Outlook highlights “significant changes to capital requirements, resolution planning, and consumer compliance and supervision.
Financial institutions must proactively evaluate their business models in response to and ahead of these regulatory changes. The finalization of Basel III demands substantial efforts toward compliance, prompting banks to understand how these changes will impact their business model and competitive position.
Addressing climate risk
Banks and financial institutions are also grappling with risks associated with climate change. Despite controversies and debates, a recent study by the University of Copenhagen suggests that the Gulf Stream could collapse as early as 2025 due to the shutting down of vital ocean currents called the Atlantic Meridional Overturning Circulation, which would have massive climate impacts globally. While scientists debate the validity of the timeframes within the study, one thing is clear: the climate is changing rapidly, and the impact of these climate shifts could destroy trillions of dollars of assets globally.
Financial regulators worldwide are urging banks to identify risk exposures associated with climate change and are intensifying efforts to prevent destabilization of the financial system. Banks must work now to establish robust processes, governance, policies, models, and infrastructure to manage this significant risk.
Technological transformation for risk functions
2024 will bring a large plate full of challenges and opportunities to the risk management tables of banks and financial institutions. Technology like AI, machine learning and advanced analytics will transform risk management practices. Further transformation and modernization are required to reduce the time and cost of compliance while providing a holistic, enterprise-wide view of risk.
