Banks Face the Limits of Modern Risk Management

Banks Face the Limits of Modern Risk Management

From geopolitical shocks to shifting trade policies and tighter regulations, today’s risk managers in banking are navigating one of the most challenging landscapes in recent memory.

When it comes to recognizing default risks in their own loan portfolios, there have certainly been easier times for banks than at present. According to a survey of risk managers, increasing threats are currently being seen in several areas.

Chief Risk Officers (CROs) are facing mounting challenges amid growing geopolitical uncertainty, trade barriers, and regulatory pressures, according to consulting firm AlixPartners in its latest «CRO Study» published on Friday.

According to the survey, 88 percent of the CROs surveyed have already adapted their existing early warning systems to identify default risks. A further 67 percent see geopolitical and economic uncertainties as the main negative factors for their loan portfolios. Added to this are trade conflicts with important partner countries such as the USA, which would further impair the stability of loan portfolios.

Operational Challenges

At the same time, sanctions and trading regimes would make everyday life more difficult for CROs. According to the survey, 45 percent of respondents cited the speed of regulatory changes in the sanctions environment as an operational challenge.

CROs are particularly challenged by the complexity of sanctions and their dependence on exports, the report continues.

Against this backdrop, CROs need to recalibrate their risk management. «Switzerland's export dependency on the USA, its role as a third country in the context of sanctions, and the increasing complexity of the relevant regulations require agile risk management,» says Veit Buetterlin-Goldberg, Co-Lead DACH at AlixPartners. «Banks' traditional early warning systems are under constant stress and need to be expanded.»

There is great potential in the area of automation and artificial intelligence. At the same time, many institutions are facing the highly complex challenge of reconciling regulatory requirements and digital transformation.

Diverging Priorities

«In general, regulatory developments in the EU, the US, and Switzerland represent a major challenge for internationally active institutions due to diverging priorities,» emphasizes Ralph Kreis, Partner and Managing Director at AlixPartners in Zurich. «These developments lead to greater complexity, potential conflicts of objectives between national companies, and therefore also to higher costs for the institution as a whole.» These costs must be offset by savings in order to remain competitive.

In addition, the shortage of specialists is forcing a rethink. 50 percent of CROs are planning to expand their staff, particularly in analytical and technology-related functions. At the same time, 27 percent would consider relocating CRO functions to more cost-effective regions. Know-how in compliance risk analysis and risk management is particularly in demand.

IT and regulatory costs would place a heavy burden on budgets. 73 percent state that IT costs – for example, for digitalization, implementing new regulations or expanding data infrastructure and cybersecurity – are currently one of the largest budget items.

Areas of Application

All respondents see AI as relevant for the future direction of risk management. However, only 28 are currently using corresponding applications systematically. This mainly relates to pilot projects for monitoring, modeling, and compliance.

Standardized, resource-intensive areas such as forecasting, transaction monitoring, reporting, and onboarding are seen as future areas of application. «The respondents emphasize the enormous potential for automation and standardization in credit processes, to move from a case-by-case approach to a portfolio perspective,» the authors write.

Practical Solutions

«AI offers banks considerable potential for optimizing efficiency and costs in the risk area, including through automation and standardization», says Partner & Managing Director Stefan Duderstadt. «We see a growing need for action in Switzerland, particularly in credit processes, transaction monitoring and fraud prevention.»

By working together with specialized providers, the integration of practical solutions could be accelerated and typical practical errors avoided, the consultants write.