For the first time since its inception over a decade ago, climate change is at the top of long-term risks for banks, according to the 11th EY and Institute of International Finance (IIF) survey – Resilient banking: capturing opportunities and managing risks over the long term.
The report. which canvasses 88 financial institutions across 33 countries. found that 91% of chief risk officers (CROs) view climate change as the top emerging risk over the next five years. This is compared to just 52% in 2019.
Around half believe that it requires urgent attention over the next 12 months versus 17% in 2019. More education is needed, as only slightly more than half or 54% have a preliminary understanding of their climate change risk exposure while over a quarter or 28% have a somewhat complete understanding.
“In the past year, we saw climate change rapidly ascend to the top of banks’ long-term risk agendas for the first time,” says Mark Watson, EY Americas Financial Services Organisation Board Matters Deputy Leader.
He adds, “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.”
In the short term or next 12 months, credit risk continues to be the number one concern. This is to be expected since as the report notes, banks came into the crisis in far better financial health than they did going into the last global financial crisis (GFC), with capital and liquidity positions strengthened substantially.
However, as it explains, “The sheer scale, depth and prolonged nature of the COVID-19- induced economic shock means banks are heavily focused on credit concerns, albeit government support measures have gone a long way in supporting businesses so far through the pandemic.”
Unsurprisingly, cybersecurity also remains high on the agenda, especially with so many employees working remotely, and plans among several organisations to introduce hybrid models.
‘While cybersecurity has long been the leading immediate concern for CROs, the COVID-19 pandemic changed the game,” Andrés Portilla, Managing Director, Regulatory Affairs at the IIF. “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.”
Looking farther down the line over the next five years, seven of the other top 10 emerging risks relate to technology and data. This ranges from the pace and scale of digitisation and industry disruption from new technology to legacy systems and IT obsolescence.
The list also includes data integrity, data privacy and the use of machine learning and artificial intelligence.
©Markets Media Europe 2021
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