Risk Management – Neofin Advisory

Top three trends/challenges for risk management in 2021?

As we welcome in the new year our thoughts come to what 2021 has in store. Besides the ongoing Covid-19 pandemic and going back into full lockdown there are three trends/challenges for risk management in 2021 tat spring to mind.

Transition out of the regulatory wave

The first challenge will be to transition out of the regulatory wave that started after the 2008 crisis. More specifically, all remediation activities within credit risk where IRB and IFRS 9 models still require significant adjustments. On the non-financial risk side, financial institutions will keep investing to strengthen their operational and business resilience whilst further work on Conduct should be expected. Additionally, I expect large programmes such as IBOR transition and post-Brexit arrangements to also consume resources and time on the risk management agenda until the end of the year.

Emerging risks

Secondly, emerging risks such climate change and cyber – even though these have been on CRO agendas for a while now – will be another key focus.

Acceleration of the transition to increased automation

And finally, the third challenge / trend could be the much-expected acceleration of the transition to increased automation and further integration of RPA/AI solutions. The revolution in this space for Risk Management is yet to come.

What are the PRA’s priorities are for 2021?

The obvious one is to ensure that the latest regulations are implemented and well embedded. There is still a lot of focus on model remediation activities. Still, climate change is definitely a priority and its inclusion in this year’s stress testing exercise is a clear message that banks need to take climate change risk very seriously. In my opinion, this initiative will be a great pulse check for the industry as it will give more clarity on where large banks stand and whether/when they can meet the ambitious goals that have been set.

Also, we shouldn’t forget that we now operate in a post-Brexit world. The PRA (Prudential Regulation Authority) is already playing a bigger role in its oversight capacity of foreign banks with branches in the UK. We expect the UK regulators to go into greater supervisory depth in order to review group level information from outside of the UK. However, the bigger question for me is whether we should expect a change in direction from UK regulators that would be led or influenced by the political, social and economic agenda and eventually play a role to ensure that the City remains an attractive place to do business.

What challenges does remote working present for risk management?

Like in any transition, there are known and unknown challenges ahead. The Covid-19 pandemic has meant the majority of office based workers are having to relocate their day to day business activities to their homes. Remote working has a vast amount of challenges for all involved, but particular concerns for risk management include:

Day-to-day operational activities

The first one is linked to day-to-day operational activities where financial institutions need to ensure an appropriate approach to working remotely, taking into account their respective risk culture. This is not just about having a stable connection and being able to join busy, back-to-back video calls throughout the day, but rather rethinking how teams retain their risk management culture and capabilities, whilst having to integrate different levels of stress and disruption originating from the pandemic. For example, the risk culture within an organisation is likely to be weakened due to reduced interactions, fewer informal chats or one-to-one sessions with SMEs, which we know have been critical in shaping stronger risk management cultures in the last 10 years. This is particularly relevant among more junior team members and new joiners.

Cyber risk

The second challenge relates to cyber risk. As remote working becomes more established, exposure to cyber risk will increase. I don’t believe that the industry has yet had the opportunity to test all frameworks and capabilities developed over the last few years, so it will be interesting to check how well some banks will do compared to others. It will also be interesting to see how regulators look at it, particularly in light of the recent operational and business resilience regulatory initiatives.

What impact will the pandemic will have on IFRS 9 modelling?

To put it mildly, the pandemic may have tested the IFRS 9 models to their limit. In the short term, it has triggered the need to review and re-calibrate models. In the medium term, it could well prompt structural changes to the way provisioning is estimated and managed. I think we are still learning to navigate through these strange times so let’s wait and see.