Global Banking Trends in Risk Management and Compliance
As the global banking landscape grows more complex, risk management and compliance matters are transforming financial systems and strategies. The IMF, in its latest Global Financial Stability Report offers a mixed view on the banking sector's ability to weather mounting storms.
Increasing economic turbulence requires banks to prepare for both expected, underestimated and unforeseen threats. While financial growth has been somewhat buoyed by post-pandemic tailwinds, leading institutions recognize the need to fortify their guardrails and prepare contingency plans for future volatility.
The IMF’s extensive global stress review of major banks reveals that while there are some pockets of vulnerabilities, there has also been a measurable improvement in systems resilience, at least for now.
Underpinning all the turbulence in financial market are the geopolitical uncertainties at play, from the regional conflicts that are ongoing at the time of writing, to the environmental disasters due to climate change that are unfolding in many parts of the world. Business continuity interruptions caused by wars, natural disasters, and other crises suppress growth, threaten security, and destabilize the financial landscape.
A looming threat comes from increasing macroeconomy volatility, which has the potential to set off other vulnerabilities and risks, unless there are robust financial contingency plans based on comprehensive scenario analysis and rigorous stress testing. In some capitals, for instance, climbing interest rates could trigger credit defaults which would in turn contribute to intensifying market fluctuations. Yet another set of risks, at the macro level, come from the lingering impact of China’s volatile real estate economy which could drag down global output to widespread stagflation. A runaway inflation, in some markets, affecting everything from food and fuel to housing costs continues to squeeze household budgets while climbing interest rates introduced to rein in prices threaten to upend asset values.
Financial institutions are having to adhere to stringent regulatory regimes that are raising the compliance bar with mandates that span Basel IV for credit and operation risk standards, and adjustments to credit valuation, as well as stricter measures for cyber resilience, data privacy, AML, KYC and more.
A growing challenge for financial institutions is the rising volume of transactions and assets migrating between traditional banks and fintech ecosystems. As fintech and crypto landscapes expand, banks are countering the marginalization of their core models by introducing advanced digital technologies to address the risks.
Modernizing data and digitizing infrastructure is highly critical for banking systems, even as many are facing budgetary limitations. Fortunately, advanced analytics and AI have proven to be extremely effective at optimizing identification, monitoring, and mitigation, while cloud platforms are offering improved flexibility and scale. But the price of creating holistic, synchronized risk capabilities is the overhauling of legacy systems to allow seamless integration.
Emerging technologies offer banks immense potential but with great opportunity comes associated operational risks. As institutions adopt innovations like artificial intelligence, blockchain and cloud computing, they must implement disciplined governance to realize gains while minimizing disruptions.
Emerging technologies can propel banks into the digital future, but imprudent implementation jeopardizes progress that can destabilize the entire financial ecosystem. Without sound planning, new solutions can spur technology failures, service outages and compromised data integrity. A single system crash could paralyze banking functions and erode consumer trust. The only way banks can mitigate risks is by developing robust IT policies, performing in-depth risk assessments, and instituting adequate data backup mechanisms.
Banks are also having to reckon with ESG mandates which call for greater focus on institutional culture and enhanced communication. Apart from instilling risk awareness at all levels, ESG compliance is becoming more important due to societal expectations and regulatory scrutiny. Institutions of all forms, including banks, are required to demonstrate commitment not only in their strategy, investments, reporting and transparency alignment, but also in their ethical commitments towards inclusivity and integrity.
Despite fierce headwinds, the IMF recognizes that progress has been made in the financial sector. Risk governance and mitigation now extends across most organizations as they apply studied governance, enhanced oversight processes and advanced technologies.
There’s no question that technology is unlocking greater accuracy and efficiency. Banks are now able to rapidly harness data and technology, and plan for the worst-case scenarios, in the face of growing threats from tech emboldened bad actors.
Yet with threats multiplying, the race towards resilience never ends and requires continuous upgrading. But with the right governance and foundation, emerging technologies can propel banks into a more secure digital future.