New technologies are changing the financial industry permanently and the COVID pandemic is accelerating the digitalization of the banking infrastructure. All areas are affected by the digital transformation – from the processing of customer transactions to decisions at the highest management level: digitalisation accelerates processes, improves efficiency, and increases the transparency of workflows.


Risk management automation lags behind

The pandemic has accelerated the transformation and automation of processes and customer management in the banking sector and elsewhere in recent months. It is therefore even more astonishing that digitisation in such a sensitive sector as risk management is less advanced at many banks than in other areas. This is the conclusion of the study “From Crisis to Opportunity: Redefining Risk Management” by Longitude, a subsidiary of the Financial Times, and SAS, an analytics and software provider. The study, published in July 2021, surveyed 300 bank executives from 24 countries. Chief Risk Officers Mandy Norton (Wells Fargo), Sadia Ricke (Société Générale), Han Hwee Chong (RHB Banking Group) and Mark Smith (Standard Chartered Bank) were also interviewed.

According to the survey, only around 10% of banks have already largely automated their risk management. Only 6% of the institutions surveyed have fully automated most of their risk modelling processes. This lack of automation limits financial institutions in predicting trends, developing results or improving their decision-making in all business areas.

The progressive part of banks leading the way in the digitalisation of risk management is reportedly already reaping the first rewards in terms of competitive advantage. Systems have become more resilient, and the higher level of automation allows for more accurate predictions of future trends and earnings forecasts.

This group of bank executives (approx. 20% of the institutions surveyed) are referred to as risk management leaders. They therefore have a higher level of maturity in risk management than the rest of the sample. These leaders more often create automated risk models and use modern processes and tools such as scenario analyses or integrated balance sheet management.

Among other things, the pioneers are able to make forecasts further in advance thanks to their investments in risk technology. Regulatory stress tests can also be implemented more quickly thanks to the automation of risk management processes, according to statements by banking professionals. In addition, the performance of the pioneering banks has improved “in several core operational areas”.



Significant competitive advantages

Specifically, 73% of the vanguard group see a competitive advantage in their risk modeling process. In the overall group, 47% state this. Another 37% of the trailblazers rate the accuracy of their profit and loss forecasts as very high. In the overall group, only 14% say so. And 44% of Risk Management Leaders can make balance sheet forecasts at least three years in advance. In the overall sample, only 19% can do that. Of the leader group, 78% say their institution has already incorporated regulatory stress testing into business planning. In the overall sample, only 45% say this.

The study also shows that the pandemic is accelerating the modernisation process in risk management more sustainably and more strongly than any regulatory requirements. A good half of the respondents confirm this. 54% of the institutions contacted in the study want to modernise their risk modelling competencies in the next two years and invest accordingly in the technical infrastructure (cloud technology as well as hardware and software for data analysis) and, above all, in specialist staff. This is a sticking point: competence carriers and specialists are scarce. The challenges that banks face in adapting their risk management are therefore quite significant.



PwC: Banks’ risk management in a state of sustainable change

In its study “Risk Management 2025”, the consulting firm Price Waterhouse Coopers (PwC) states that risk management in banks is “undergoing a sustained transformation“. Dr. Sami Khiari, risk expert and partner at PwC Germany, puts it this way: “The COVID 19 pandemic has shown that challenges are becoming more complex and that non-financial risks can only be anticipated imprecisely. Analysis of the past remains, plus more and more predicting and looking at the risks of the future.” This leads to “a comprehensive transformation in risk management itself, as well as in the organization and integration into a bank’s business model.” For the study, 80 senior risk officers from 60 international banks were surveyed.

The interviewees see key challenges in a stronger emphasis on operational resilience and the integration of risks. About two-thirds of banks identify the greatest need for change over the next three years in non-financial risks. While most of the institutions contacted by PwC are expanding coverage of non-financial risks and investing in new capabilities, “a significant leap is needed across the industry,” he said. Only with such a show of force “can forward-looking and data-driven insights be gained.” The study’s authors also include “closer integration of the risk and compliance functions.



Operational resilience a key element

Another priority for banks is for risk managers to develop innovative approaches to address thematic and non-financial risks. The greatest threats to the financial industry are seen in cyber risks and ESG (77% each), as well as increasing regulation (62%). ESG (= Environmental, Social and Corporate Governance) refers to a company’s collective awareness of social and environmental issues. In addition, according to the study, fraud, “money laundering, or the ever-increasing dependence on a complex network of third, fourth and fifth parties”. As the growing number of risks is difficult or impossible to predict, operational resilience is becoming a key tool for management.

The industry is “still at a very early stage of analysis. Challenges related to data and infrastructure could mean that the risks and opportunities cannot be adequately assessed,” the study points out. In some cases, this leads to “significantly increased staff requirements for the area of non-financial risks”. Recruiting the “right” employees is of existential importance.

The ideal risk professional of the future would need to be able to generate a variety of “key competitive advantages” “to drive the adoption of new technologies, improve risk culture and reduce costs”. Typically, risk management at the institutions surveyed accounted for only 2% to 4% of the total workforce – “often with enormous cost pressures on the risk organization (up to 15%).” In some institutions, risk management even accounts for more than 25% of total costs. PwC warns that this creates “a strong area of tension in which the value and benefits of the risk function need to be emphasised much more strongly”.



Automation and digitalization are advancing rapidly

In terms of technology, the banks are increasingly relying on big data, artificial intelligence (AI) and machine learning to manage risks, the report continues. In the long term, the banks hope to reduce costs by up to 25% through the digitalisation of risk management. The digitisation of risk management had progressed significantly, it added. “We are seeing significant investment in systems, tools and enhanced analytics capabilities,” says PwC risk expert Dr Sami Khiari.

The development of dynamic and future-oriented analysis functions, e.g., to capture extreme scenarios such as cross risks and outlier events, is often only possible with artificial intelligence. This is also shown by the rapid increase in AI-based tools and models used in banks’ risk management.

Risk functions must keep pace with business transformation to meet cost demands, control bottlenecks and drive significant improvements in effectiveness and efficiency, the PwC study concludes. The “essential mandate of the risk function” is to “independently calibrate or manage the bank’s risk appetite across the board”. This was recognised by 90% of the banks surveyed.

Manred Kröller
Financial journalist



This post has been translated automatically



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