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Refocusing risk and resiliency amidst continued uncertainty

Global risk management survey, 12th edition

In an effort to contain COVID-19, governments across the world imposed a series of lockdowns and other restrictions on economic activity. Many businesses closed or had their employees work remotely. Also, consumers dramatically changed their behaviour and spending patterns. According to senior risk executives in the financial services sector, what is the impact of these developments, in terms of financial as well as nonfinancial risks?

Uncertain outlook

In 2020, risk management at financial institutions faced unprecedented challenges as the world responded to the global health crisis caused by COVID-19. The measures taken to spread the virus triggered a sharp economic downturn and far-reaching social impacts. The outlook for 2021 and beyond remains uncertain as we are all still battling to control the spread of the pandemic.

Increasing credit risk

In times of economic downturn, concerns over credit risk usually peak. So it’s not much of a surprise that 20% of respondents named credit risk as the risk type that will likely increase the most in importance for their institutions within the next two years. In 2018, this was only 3%. The most challenging areas will be collateral valuation (48%), commercial credit (48%), commercial real estate (43%), unsecured credit (43%), and leveraged lending (41%) 

Nonfinancial risks

While almost all respondents rated their institutions as very effective at managing financial risks, the figure dropped to 65% for nonfinancial risk overall and was even lower for specific types and aspects such as conduct and culture (55%) and data quality (26%). There are continuing concerns over cybersecurity, especially with employees working at home due to COVID-19. Another vital nonfinancial risk concerns third parties, for instance in the field of data privacy, non-performance, unethical conduct, and the loss of business continuity. Last but not least is environmental, social, and governance (ESG) risk. This topic is receiving greater attention from financial institutions, yet only 33% of respondents considered their institutions to be very effective at managing this risk.

The potential for digital risk management

Increasingly, financial institutions recognize the potential to leverage AI and digital technologies to reduce risk management expenses as well as boost effectiveness. Yet despite these expected benefits, most institutions have not yet implemented these technologies. Also, leveraging emerging technologies requires comprehensive, high-quality, timely risk data. But many institutions are still facing challenges in this field, especially for nonfinancial risks.  

More challenges and progress

Other challenges arise from the three lines of defense risk governance model, such as defining the roles and responsibilities between the first (business) and second line (risk management). Also, stress tests for nonfinancial risks remain a concern. On the bright side, there is continued progress on risk governance, and the chief risk officer (CRO) position is universally adopted. That is vital, since the challenges have not been this great in recent memory and in order to meet them successfully, risk management will need strong governance, as well as the agility to respond to the growing number of risks in these volatile times.

Deloitte’s Global Risk Management Survey, 12th edition

All the above topics are discussed in detail in the Global Risk Management Survey - Deloitte’s ongoing assessment of the state of risk management in the global financial services industry. The findings are based on the responses of 57 financial services institutions around the world across multiple financial sectors. In addition, this report is based on in-depth interviews conducted with a number of senior risk executives to gain deeper insight into the issues highlighted in the survey.

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