As we hit full speed with our plans for the coming year, it’s only natural to consider what the months ahead will bring. Yet, in the risk management realm at least, this annual look forward feels somehow different. There’s an unspoken gravitas to the exercise as we survey the dominant trends coloring the global economic picture: high inflation, rising interest rates, geopolitical frictions, and an increasingly likely global recession, among others.
While these factors don’t exactly paint sunshine and rainbows for 2023, the pandemic’s upheaval has taught risk professionals valuable lessons that will serve them well as they face the challenges ahead.
So, what’s on the risk management horizon? And how might risk professionals augment their vast experience and expertise with the right technology for greater agility in the year to come? Complementing my colleague
Stu Bradley’s fraud and financial crimes predictions, I polled my world-class Risk Research and Quantitative Solutions (RQS) team and compiled SAS’
top five risk management predictions for 2023.
Prediction 1: Risk pros see the return of (some) predictability – and a scenario analysis renaissance.
The COVID-19 pandemic upended long-established risk models almost overnight. While financial firms will feel the ripple effects for some time, risk pros will start seeing the pendulum swing toward greater predictability, according to
Anthony Mancuso, Director of Risk Solutions Consulting:
“2023 won’t be the year of chaos. In fact, 2023 will mark the return of some degree of predictability. The economic impacts of this once-in-a-lifetime pandemic were to be expected: pent-up demand, tight labor markets and supply chain struggles. These factors in combination were bound to stoke inflation, prompting rate increases as an obvious policy response. Anticipate increased delinquencies in retail and commercial portfolios and high market volatility as the world continues to navigate the fallout. Robust scenario analysis, near-real-time monitoring, and general organizational agility will rule the day.”
RQS Principal Solutions Advisor Christian Macaro also foresees that risk professionals will lean heavily into scenario analysis to weather today’s disruptive trends:
“Swirling uncertainty around climate change, geopolitical instability, energy crises and other factors will inspire a scenario management and analysis renaissance. Far from being static inputs, scenario will become
dynamic inputs of common risk models. Topics like scenario creation, scenario perturbation, risk analysis associated with a given scenario, and reverse-engineering of a scenario will be able to answer questions left unanswered by traditional approaches.”
Prediction 2: Asset liability management takes center stage as credit, liquidity and other risks soar.
Banks are right to be cautious heading into 2023. Market conditions are rife for economic volatility and rising defaults, warns
Stas Melnikov, Head of Risk Portfolio:
“Rising interest rates and the strengthening US dollar signal trouble in the face of historically high sovereign debt and ongoing geopolitical instability. 2023 could see a string of sovereign defaults, while liquidity challenges in treasury markets have the potential to spark flash crashes, exacerbating market fragility. These factors combined will force an economic reckoning, particularly among so-called ‘zombie firms’ – companies that don’t turn enough profit to cover their debts – as borrowing becomes more expensive and less abundant. Companies that lack strong balance sheets and ability to generate cashflows will be at high risk of default, while those that survive are apt to prioritize the quality of earnings and cashflow sustainability over their growth rates.”
In that vein, financial institutions will need to optimize their risktech capabilities to anticipate, and quickly adapt to, shifting market conditions.
Wei Chen, Director of Global Risk Consulting, explains:
“Credit and liquidity risk will be top of mind in 2023 as interest rates remain a market focus, increasing the value of integrated balance sheet risk management. Likewise, risk professionals should anticipate potential changes to the expected credit loss under IFRS 9 and CECL. The sector’s first major, post-implementation economic cycle proved a worthy stress test of the new regulatory standards. How banks might adjust loan-loss provisions amid a turbulent economy remains to be seen.”
Prediction 3: Financial services reaches new heights – and greater speeds – in the cloud.
The financial services sector’s embrace of cloud computing is nothing new, but it continues to gain momentum, fueled by the industry’s accelerating digitalization. The
Banking in 2035: Global Banking Survey Report revealed digital transformation as the top strategic priority for banking leaders in the next three to five years, cited by 57% of execs surveyed. Our RQS experts anticipate this trend will further propel banking’s cloud push in 2023.
“As changing relationships across risk factors expose the limits and weaknesses of legacy risk management systems, financial institutions will turn to APIs and other tools to patch or replace weak links as they are found,” predicts
Martin Zorn, Managing Director of Risk Research and Quantitative Solutions. “Cloud computing and speed-to-market of targeted solutions will grow significantly more important as institutions first seek to ‘plug the leaks in the dam’ before tackling large-scale replacement of legacy systems.”
Cloud initiatives will also help banks better mitigate risk and make them more responsive to consumer demands, adds
Terisa Roberts, Global Solutions Lead for Risk Modeling and Decisioning at SAS and co-author of the new book,
Risk Modeling: Practical Applications of Artificial Intelligence, Machine Learning, and Deep Learning.
“Banks will need more agile, vigilant and responsive risk decisioning capabilities, powered by AI and machine learning, to navigate post-pandemic economic volatility,” Roberts says. “Meanwhile, their customers expect lightning-fast credit decisions, anytime, anywhere. Checking all these boxes is only possible through digitalization, APIs and cloud-based computing.”
Prediction 4: Meaningful environmental, social and governance (ESG) progress advances customer trust and loyalty.
Managing climate-related risk is quickly becoming a banking imperative. While progress has been slow, technology will undoubtedly play an important role. In fact, 2023 could bring some meaningful advances, says
“After years of being largely an academic exercise, elements of ESG will make their way to practical application at some degree of scale,” he predicts. “While truly effective modeling and stress testing remain an aspiration, megadroughts in the US, critically low river levels in Europe, and retreating ice coverage at the poles provide the kind of images that could galvanize public opinion and catalyze governmental action. Recently released regulations in Canada and Europe provide further incentive to begin data collection and reporting activities.”
Alex Kwiatkowski, Director of Global Financial Services at SAS, also foresees banks doubling down on ESG progress.
“Amid ongoing economic turbulence, one might expect financial institutions to curtail their ESG initiatives, but signs point to the opposite,” says Kwiatkowski. “Among 500 banking executives surveyed for SAS’
Banking in 2035 study, 64% indicated they believe banking lags other sectors in advancing ESG goals. Execs also identified ESG among the top three greatest opportunities for banks over the next decade.
“Clearly, financial services leaders recognize the opportunity to shore up long-term resilience, even as they weather the coming storm. With ESG as a north star, banks could emerge from this recession more fiscally resolute – and those that lead in the ESG revolution will no doubt reap the added reward of having furthered customer trust and loyalty in the process.”
Prediction 5: Consumers feel the squeeze of rising risk in the financial services sector.
Financial institutions will increasingly, out of necessity, pass surging risk costs on to their customers, agree SAS’ RQS experts.
“As increasing delinquencies, rising interest rates and reduced revenues force banks to limit exposure, consumers can expect reduced credit limits, fewer and less favorable offers, and higher prices,” says Senior Risk Solutions Advisor
Naeem Siddiqi. “Similarly, as financial risks from climate change are better understood, banks will begin pricing it into mortgages and commercial loans. Those who live in active hurricane, flood and fire zones should anticipate higher credit costs.”
The insurance sector will employ similar cost pass-throughs, anticipates Thorsten Hein, Principal Product Marketing Manager for Risk Solutions.
“Increased inflation will fuel significantly higher property and casualty insurance premiums for consumers and commercial entities,” says Hein. “To remain competitive, insurers will need to optimize every facet of the business – especially pricing, where they have the dual challenge of appeasing price-sensitive customers while maintaining sufficient reserves.”
Resiliency rules in 2023
Among these diverse predictions, a theme for 2023 has emerged: resiliency. Risk professionals, financial services organizations, regulators and governments must collaborate more closely than ever to meet shared challenges. Pushing the technology innovation envelope can help the industry mitigate burgeoning risks, comply with shifting regulatory demands, and attract and retain customers.
Working together, we will meet 2024 a little bit older but much wiser – and considerably more resilient to the risk ahead, come what may.
- SEO Powered Content & PR Distribution. Get Amplified Today.
- Platoblockchain. Web3 Metaverse Intelligence. Knowledge Amplified. Access Here.
- Source: https://www.finextra.com/blogposting/23642/risk-and-resiliency-5-risk-management-predictions-for-2023?utm_medium=rssfinextra&utm_source=finextrablogs