In 2018, Deloitte Switzerland launched a Risk Executive Network (REN) for CROs in leading Swiss banks, to exchange views on risk in the financial services industry. The REN holds three events each year, attended by up to 15 CROs from leading financial institutions. The impact of COVID-19 on financial institutions, the economic downturn and the changes brought about by working from home all have far-reaching implications for risk, compliance and regulatory management functions. Prior to the regulatory measures that were taken in response to COVID-19, risk management in banks was concerned primarily with issues of scale and scope. Priorities have changed as expectations about the future have adjusted to today’s uncertain environment.During our 7th REN event in May 2020, when measures in response to the first wave of the virus were already two months in place, we obtained an initial assessment from the attending CROs about the key impacts of the pandemic on their respective financial institutions and their expectations for the way forward. Following the recent lockdown in response to the second wave of the virus we repeated this ‘pulse check’ during our 9th REN event in January 2021. A comparison between the two assessments allowed us to capture the impact of COVID on the agendas of CROs in financial institutions.
In general, we find that banks remain optimistic due to the non-financial nature of the crisis so far. The proportion of FTEs working from home did not change significantly between wave 1 and wave 2 (around 80% WFH share).
However, there have been some interesting shifts in focus.
Figure 1: Overview of change in CROs’ priorities between May 2020 and January 2021
With the onset of COVID, the quality of the loan book has become the main concern (top priority) among CROs about financial risks over the next six months. This is because there has been an increase in default risk due to the economic consequences of prolonged lockdown and the stock market corrections that have occurred. A clean-up of the loan book and a review of asset quality are expected in preparation for tough times ahead. Interestingly, concern about a lack of demand for financial services appears to have declined during the second wave of the pandemic. We have already analysed this issue in our two-part blog series and discussed the initial responses of banks, such as higher default provisions (see: Financial service providers should not ignore the risk of loan defaults part 1 and part 2).
Non-financial risks (NFR)
Cyber risks and other operational risks have continued to dominate the agenda of risk managers during both the first and second wave. With the huge increase in working from home compared to the pre-COVID period, the exposure of companies (banks themselves but also their clients and business partners) to cyber risks has increased substantially. This has made the whole issue even more important than it was already due to previously planned digitalisation efforts, and it increases the pressure on institutions that are not yet far advanced in digitalisation. We also observe a large increase in regulatory compliance concerns that will have to be dealt with, following the lower priority given to them during the pandemic. A driver for this is the introduction of regulations by FINMA (e.g. expiration of COVID-19 exemptions, climate risk disclosure circular 2016/1, liquidity risk circular 2015/2) which have come into focus just before or during the COVID-19 crisis. The effectiveness of managing regulatory compliance was rated as only medium by the CROs participating in the 9th REN event, so this topic can be expected to top the agenda for CROs over the longer term.
Six months radar
When asked what they will prioritise in the next six months, answers from CROs revealed that the prioritisation has not changed fundamentally over the past year. Cost efficiency measures through process optimisations, automation, digitalisation and effective analytics remain the chief concerns. However, more importance is now being given to new ways of remote customer acquisition and business development, and staff retention and strengthening team spirit are also on the CROs’ radar.
In addition to the core areas of banking, the portfolio of relevant issues for CROs has broadened, due not only to COVID but also to other developing trends such as sustainability. This is enhancing the role of risk management executives in corporate governance, but it also points to a need for stronger risk management capabilities.
Deloitte's Financial Service Transformation team appreciates its regular discussions with CROs and other executives about the changing agendas of banks.
Please contact us if you would like more information or are interested in Deloitte’s Risk Executive Network.
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