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Ey Resilient Banking Capturing Opportunities and Managing Risks Over The Long Term
Ey Resilient Banking Capturing Opportunities and Managing Risks Over The Long Term
capturing opportunities
and managing risks over
the long term
Executive summary
workforce resilience became more prominent. an increased attack vector, and so many
Not only did employers realize employee well- more customers accessing financial services
being has to be considered during COVID-19 remotely than ever before.
times, but it needs to be in the forefront of
their thinking on an ongoing basis. This is Societal resilience became that much more
For well over a decade, EY and the Institute of especially the case now that we all realize
a hybrid working model – working at home
important. During 2020, as people worked
and schooled from home, it was very evident
International Finance (IIF) have had the privilege of and in the office – will be an enduring feature the negative impact people have been having
of the workplace. At the same time, events on the planet at large. Who wasn’t shocked
analyzing and commenting on the transformation in related to racial equity and subsequent social by satellite images over metropolitan areas
unrest greatly elevated our focus on diversity, showing how the smog of industry and
how banks manage traditional and, more recently, equity and inclusiveness in society at large, commuting lifted as we stayed at home? We
as well as in the workplace. all knew the effect was real, but perhaps it
emerging risks. In aggregate, progress has been was difficult to grasp: seeing glaciers melt
Technology resilience came to the fore, in Greenland felt too distant for so many
significant, but incremental and evolutionary. a result of greatly accelerated moves to of us. Thus, climate change has become
transform digitally. Change that many assumed the existential threat to the planet, with
would take years suddenly happened in a significant consequences for the financial
Then along came COVID-19. It proved to be higher-quality capital and liquidity paid off matter of weeks or months. The art of the services sector.
the most unprecedented and unexpected and allowed banks to contribute materially possible became the art of the actual. With it
test of banks’ risk management – and of to supporting communities, economies and has come energizing opportunities to deliver Resilience, then, becomes the defining
decade-long regulatory reforms. A global financial markets, while remaining financially more value to customers and transform characteristic of long-term success for
health crisis brought economies across the safe and sound. IT systems, albeit in many operating models and ways of working. But banks globally. Bank boards and senior
globe to a virtual standstill in a matter of cases legacy systems, held up and allowed new risks abound, including how to build in management, advised by the chief risk officer
weeks and quickly evolved from a health employees to move swiftly to remote working resilience by design; carefully manage the (CRO) and risk team, have to capture the
crisis into an economic crisis. at a scale never seen before. For the most part, transition to the public cloud; and govern potential offered by change, manage the
virtual working and digital channels to access and manage risks associated with large scale associated risks and remain resilient across
Financial and operational resilience were products and services worked. use of machine learning (ML) and artificial many complex dimensions.
tested to the core. Thankfully, for the intelligence (AI). Cybersecurity concerns
most part, the banking sector found that But, COVID-19 also opened our eyes to remain top of mind, especially within a
a decade-long effort to build greater and broader dimensions of resilience. To start, sustained remote working environment with
03 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Since the last EY/IIF risk management survey,1 up board and CRO agendas. Geopolitical
a lot has happened. Going into 2020, the concerns also rumbled in the background.
main topic for many was climate change.
It was the center of attention at the World Then came COVID-19. An unprecedented
Economic Forum in Davos. What had felt like public health crisis hit globally, with severe
an emerging issue had hit a crescendo on the economic implications. The widespread
world’s political and business scenes. impact on the economy triggered turbulence
in financial markets and the real economy.
For sure, there were growing concerns about Even today, we are still reeling from the
the global economy. In the 10th annual effects and likely will be for years to come.
survey, credit risk had been working its way
1 - How banks can elevate risk management over the next decade
04 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Not surprisingly, credit risk has become the the prospect of remote working being a
Environmental concerns among CROs Environmental concerns among boards number one risk over the next 12 months. permanent feature of many workplaces.
Banks came into the crisis in far better High-profile cyber attacks also explain why
financial health than they did going into cybersecurity remains high on board and
the last global financial crisis (GFC), with executive agendas (ranked second for both).
capital and liquidity positions strengthened The risk that has shot up the agenda
substantially. But the sheer scale, depth most, however, is climate change and
and prolonged nature of the COVID-19- environmental concerns more generally.
induced economic shock means banks are
heavily focused on credit concerns, albeit Almost half (49%) of CROs now view it as
17% 49% 6% 37% government support measures have gone a top risk requiring their upmost attention
a long way in supporting businesses so far over the next 12 months. Eighteen months
through the pandemic. ago, only 17% took that view. CROs highlight
18 months ago Next 12 months 18 months ago Next 12 months this risk is also higher on the short-term risk
Cybersecurity remains high on the agenda for boards – over a third (37%) of
agenda, of course, especially with so many CROs believe their boards see climate risk as
employees working remotely, and with a top risk priority, up from just 6% in 2019.
05 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Figure 1: Risk issues garnering CRO and board attention over the next 12 months
“
COVID-19 demonstrated how suddenly risks and priorities can change – and
therefore, how crucial flexible and dynamic risk management frameworks are.
– Tim Adams, President and Chief Executive Officer, IIF
CRO Board*
22% Employee-related risks (e.g., fatigue, mental illness) 24% Implementation of regulatory rules/supervisory expectations
16% Risk technology architecture 20% Employee-related risks (e.g., fatigue, mental illness)
14% Geopolitical risk 20% Conduct risk (e.g., actions that violate laws or rules)
The focus on climate change is even more Figure 2: Most important emerging risks over the next five years
striking when viewed over the next five years,
as shown in Figure 2. Over nine in 10 CROs
(91%) and boards (96%) view climate change Concern to CRO Concern to board*
as the top emerging risk. Only about half
(52%) of CROs stated that in 2019.
91% Climate risk 96% Climate risk
Second most important is the length and
depth of the global economic recovery. The
near-term risk priority may be credit, but 83% Length and depth of global economic recovery 85% Length and depth of global economic recovery
banks remain worried that prolonged adverse
economic conditions will continue, especially
as countries may face new waves or variants 68% Pace and breadth of change from digitization 68% Industry disruption due to new entrants
of COVID-19 and support measures are
expiring. The longer we have depressed
economies or uneven recoveries, the worse 62% Industry disruption due to new technologies 66% Pace and breadth of change from digitization
credit issues are likely to become.
From a CRO perspective, seven of the other 60% IT obsolescence/legacy systems 62% Industry disruption due to new technologies
top 10 emerging risks over the next five
years relate to technology and data: the
55% Integrity of data/data destruction 53% Geopolitical risk
pace and scale of digitization and industry
disruption from new technology; legacy
systems and IT obsolescence; the pace and 53% Use of ML/AI 47% IT obsolescence/legacy systems
scale of digitization and industry disruption
from new technology; IT obsolescence and
legacy systems; data integrity; data privacy 53% Industry disruption due to new entrants 47% Data privacy
and the use of ML and AI. CROs believe
boards have similar concerns, although they
indicate boards are more focused than they 53% Data privacy 43% Resurgence of COVID-19/occurrence of another pandemic
are on industry disruption from new entrants
and geopolitical matters (see “Managing
geopolitical risks”). 51% Model risk related to ML/AI 43% Industry disruption due to regulatory arbitrage
Figure 3: Global industry convergence, regional divergence Still expect strong returns, albeit depressed
Forward predictions of return on equity over the next three years by COVID-19
Workforce resilience
Operational resilience
Digital transformation
Financial resilience
Risk reporting/data
Internal controls
Automation
Infrastructure enhancements
Indeed, COVID-19 – and before that, the financial services can play as a catalyst to broader aspects of resilience, with 57%, 53% financial resilience, as you would expect
growing focus on climate change – highlighted customers and clients doing more to slow and 47%, respectively, viewing the ability after decade-long capital and liquidity
that, if the last 10 to 12 years has been climate change – and better manage the to recover financially, the need to support enhancements. The somewhat unexpected
about financial and operational resilience, associated risks. the community and environment, and the success of work from home during COVID-19
the next decade will emphasize other broader need to contribute to financial stability as also makes CROs fairly confident about
aspects of resilience. These include the Bank CROs have a clear view on which important. workforce resilience, although there are real
resilience of technological transformation, aspects of resilience are most important. concerns about retaining a strong culture
which has been accelerated through They view continuously delivering services They are also open about the fact that and controls and managing workforce
COVID-19; the enduring need to focus on and maintaining safety and soundness their organizations have real work ahead fatigue. They are less confident about their
workforce resilience and employee well- as extremely important (82% and 63%, to enhance their firms’ resilience, as shown banks’ technology and societal resilience.
being; and societal resilience and the role respectively). But they also recognize the in Figure 5. They are fairly confident about
10 11th annual EY/IIF global bank risk management survey Resilient banking | EY
“
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Environmental/societal resilience
Managing geopolitical risks Figure 6: Top geopolitical risks affecting banks in the next year
Banks’ boards and CROs view geopolitical in engaging with executive leadership and 42% Changes in global trade environment
risks as significant. Indeed, roughly the board to inform decision-making (57%).
half place such risks in their list of top Nearly three in 10 said that they plan to
39% Escalating cyber warfare (including between nation-states)
emerging risks over the next decade. connect better with industry groups to
About the same number (53%) expect coordinate actions on political risk. This
political risks to have more of an impact on seems to already be starting – over a 35% Changing global role of China
their organizations over the next year. third of respondents are coordinating
via industry groups to address growing
CROs indicate their concern is driven societal risks (36%). 30% Push to account for materiality of climate change
by a number of risk issues, as shown in
Figure 6. Many of the issues should come As human-capital-driven companies,
26% Populism
as no surprise, given the focus on each banks are rightfully focusing on
in a period that featured trade conflicts, their employees and proactively
major state-led geopolitical attacks and communicating with them on social issues 26% COVID-19-related geopolitical tensions
a swath of climate initiatives leading up (66%). In a period that has seen high
to the UN Climate Change Conference levels of social protests and tensions in
(COP26) in November 2021. Executives many major economies, banks recognize 25% Emerging-market volatility
overwhelmingly indicate that a negative the associated reputational risks. Some
impact on demand (72%) or unexpected are connecting employee communications
23% An elongated fallout from Brexit
market volatility (67%) are most likely to to a broader enterprise risk approach
affect their business. to social risk (36%) or setting up cross-
functional offices to chart strategies on 21% Changing global role of the US
Banks are focusing on better managing these issues (20%).
geopolitical risk. Over half of respondents
indicate they plan to increase investment 7% Changing global role of the European Union
12 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Over the course of our past 10 risk surveys, there has been
a clear trend toward investing more in risk management.
Certainly, the skills required to manage ever-more
complex risks have continued to evolve and this year
is no different. Nine of 10 banks expect to broaden the
skills within their group, with most (85%) making some
targeted additional hires and a small number (5%)
expecting to add additional skill sets across a number of
areas (see “Risk skills of the future”).
13 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Figure 7: Expected trajectory of the cost of controls over the next three years When previously asked about future technology and data. Over three-quarters
budgets, the common response was that the (76%) of banks are automating manual
cost of risk management was going up. Few, processes, considering ways to enhance
Increase >25% if any, banks had found a way to maintain risk data (56%) or harmonizing control
or enhance risk management, while frameworks (36%). However, there are
simultaneously reducing costs. countervailing needs that could push up
Increase 16-25% the cost of controls, notably managing
This year’s survey suggests banks are risks associated with accelerated
starting to diverge in their strategies. About technology transformation (67%), enhanced
Increase 1-15% two-third of banks (69%) are still expecting cybersecurity to support remote working
the cost of risk management to go up, with (56%) and enhanced or new regulations or
over a quarter (27%) expecting that increase supervisory expectations (26%).
No impact to be over 15%, as shown in Figure 7. But
a significant minority (21%) see a pathway Time will tell whether an increasing number
to decreasing the cost of risk management. of banks are able to balance the need
Decrease 1-15% to invest in new controls and leverage
The fact that we are seeing some banks technology and data analytics to do more
chart a pathway to cost control points for less. Those banks that get the balance
Decrease 16-25% directly to the ever more present use of right will likely excel.
Decrease >25%
Risk skills of the future Figure 8: Most important risk management skills over the next three years
If COVID-19 has taught us anything, requires employees being predisposed Cybersecurity 75%
it is that flexibility and agility are to faster, more incremental change, but
essential. Most CROs (70%) believe they and their leaders have to embrace
the ability to adapt to a changing risk a test-and-learn and deal-with-failure Data science 74%
environment is the most important skill culture. Performance and reward systems
to be prioritized in the coming years. Risk have to be able to recognize more complex
professionals need to be able to focus on individual and group contributions. Thus Climate change 57%
value-added, growth-oriented roles for far, risk management teams have been slow
risk management (cited by 49% of CROs) to actively adopt agile decision-making. AI-based model risk management 51%
and know-how to leverage data (48%).
They increasingly need to know more The specific skills in demand by those
about agile ways to innovate and have a banks adding new professionals over Data modeling 48%
broader understanding of risk domains. the next few years align with new
risks, such as climate change, and new
Agility fits within broader moves to technologies used in risk management Operational resilience/business continuity 46%
agile ways of working, in which and across the banks, such as data
governance and organizational analytics science and AI, as shown in
Governance risk and controls 38%
structures have to be adapted to speed Figure 8.
up decision-making. Making it work,
however, is complex because it not only ML 36%
“
COVID-19 has further underscored that agility remains one of
the most important skills for risk managers, who have to manage
Credit risk
The fact banks came into the COVID-19 crisis with such
strong capital and liquidity positions – and for the most
part, those cushions still remain – put them in a strong
position to play a critical role in supporting economies,
communities, customers and clients.
16 11th annual EY/IIF global bank risk management survey Resilient banking | EY
41% 41%
48%
Difficulties in implementing Depth/capacity of your The reaction of the Dependence on traditional Quality of your credit Lack of flexibility offered Quality of your stress
loss-mitigation strategies for workout team shareholder/analyst risk indicators monitoring by your regulator on your testing results
customers/clients at scale community capital cushion
“
Together with extensive government support programs, banks showed enormous initiative in helping their customers and communities throughout the crisis. But there
is prevailing uncertainty about the strength and breadth of the economic recovery. – Richard Gray, Director, Regulatory Affairs, IIF
17 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Figure 11: Top concerns about loss mitigation/forbearance decisioning During COVID-19, banks enabled government coming 12 to 24 months, a large majority
over the next 24 months support programs and proactively initiated (69%) of bank CROs are most concerned
measures and programs to support about future regulatory inquiry and action
households and businesses experiencing about how government stimulus programs
financial hardship. Such relief included were administered by banks. The fact
Future regulatory inquiry and action 69% direct payments, offering loan-payment governments emphasized the need for a
forbearance, fee reductions or waivers, and swift distribution of funds meant banks
Incorporating forbearance decisions into suspension of home foreclosure and evictions had to scale up processes significantly
evaluation of firm’s overall risk profile 53% or repossession. Banks know the initiatives and quickly to meet customer needs and
were necessary and part of their ongoing government expectations.
Proper integrated testing, quality commitment to their local communities.
45% Other concerns, shown in Figure 11, relate
assurance/control activities
However, banks have concerns about how to the practicalities of implementing loss-
Updating current and aligned policies, they will work with millions of customers and mitigation for vast numbers of customers
43%
standards and procedures clients in getting them back on track financially. in a way that aligns with the bank’s risk
Forbearance doesn’t equal forgiveness. appetite and its policies and procedures, and
provides for equitable outcomes across all
Forbearance impact to capital and liquidity 34% In terms of loss mitigation and forbearance types of borrowers.
decisions that will need to be made over the
“
Ability to reach impacted borrowers 28%
About one in 10 (12%) believe there will be testing and risk reporting, as shown in
no change – in effect, regulations have been Figure 12. Interestingly, over half (53%)
found to be effective, overall. Almost twice of banks expect tougher requirements
that number (22%) believe the COVID-19 for capital and liquidity in the context of
experience will generate more energy to climate change. This reflects the growing
reviewing financial regulations, with a view focus of prudential regulators on potential
to identifying areas where regulations can financial consequences – for bank safety and
be eased permanently. Here, banks have soundness, as well as financial stability –
in mind regulations linked to leverage, from climate change.
margining and procyclical measures, which
may have constrained banks’ abilities to An interesting question for regulators to
support economies and financial markets or consider as they reflect on lessons learned
necessitated more central bank intervention during COVID-19 will be banks’ reticence
than may have been needed otherwise. to avail themselves of voluntary capital or
However, two-thirds of bank CROs expect liquidity buffers (above regulatory minima).
new or additional regulatory requirements, The vast majority (88%) of banks in this
once we get past COVID-19. Such changes survey did not draw down on their buffers.
are expected most in the areas of stress
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Figure 12: Expected new or additional financial resilience requirements over the next three years
The initial focus was on cybersecurity – the dependence on third (and fourth) parties
intensity of attacks on banks, and growing – especially vendors who are critical to
threats of a destructive nature, put cyber institutions or the industry at large.
risks at the top of the agenda and they remain
central concerns for regulators, boards Most recently, enterprise resilience centered
and CROs. on end-to-end continuous delivery of critical
services. This can be seen clearly in guidance
However, in recent years, the focus shifted or requirements issued by international
to broader operational resilience challenges groups, such as the Basel Committee on
associated with an ever more complex Banking Supervision, or domestic regulators
financial ecosystem and increasing in the UK, US, European Union and elsewhere.
22 11th annual EY/IIF global bank risk management survey Resilient banking | EY
In some ways, the For the most part, banks have performed
very well. In reality, we have all been
to third parties have clearly been further
prioritized, as has technology capacity
was IT change management and third-party
risk management. Indeed, few areas can be
pandemic can be viewed encouraged by just how well banks – and related to staying resilient (see “Focus on viewed as fully integrated.
other organizations – transitioned to a fully critical vendors”). Inevitably, this means
as an extreme live test for remote model without major, sustained banks will need to invest more in resilience This highlights the fact that operational
problems. The technology worked generally, over the next few years. After all, very little is resilience has to be woven deep into the
operational resilience. business got done and customers and clients viewed as a low priority. fabric of operations and risk management,
have been able to access services remotely leveraging across existing approaches, and
and securely. To some degree, changing priorities reflect not viewed as a distinct discipline operating
Every aspect has been tested for a sustained the learnings banks accrued in seeing in isolation. Many employees have a role to
period. Prior to COVID-19, banks were But there are lessons to be learned from an how well various risk frameworks were play in helping banks maintain services for
typically running simulations to see how operational resilience perspective. Banks integrated into operational resilience. As their customers and clients, whether working
long they could sustain services during a highlight a large number of high-priority shown in Figure 14, a large majority of banks remotely or onsite.
disruption lasting days or weeks. COVID-19 tasks over the next three years, as shown in acknowledge data management and privacy
has tested capabilities for over a year. Figure 13. Cybersecurity and matters related were not that well integrated, and neither
23 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Figure 13: Resilience priorities over the next three years Figure 14: Observations on integration between risk
frameworks and operational resilience
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Complexity of simulations
Low priority Somewhat low priority Neutral Somewhat high priority High priority Not integrated Partly integrated Fully integrated
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“
Banks have identified a number of important lessons learned through COVID-19 to better deliver services end to end. – Ali Kazmi, EY EMEIA Resilience Leader
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Focus on critical vendors customers, as well as internal or enterprise- However, while another three in 10 banks improve resilience of their critical third-party
wide functions critical to operations. These had pre-identified their critical third parties, service providers and the broader supply
As banks have been pushed by regulators to will be foundational to any external-facing they found their plans less effective than chain that supports the banking sector,
focus on end-to-end delivery of services, they services and can be critical in their own right. expected. A tenth of banks realized they had as shown in Figure 16. As one CRO put
have had to review which third parties are more critical third parties than they thought. it, “We need more real-time engagement
critical. If the service is critical, so too is the In considering their COVID-19 experience, with our supply chain – and not just annual
third party that supports it (and even more most banks (60%) believe they had already Notwithstanding their level of preparedness, assessments. We need to engage key
so, third parties that support multiple critical identified their critical third parties and had banks have identified a broad set of actions suppliers in different ways.”
services). This includes services provided to effective plans in place to manage them. they plan to take in the next two years to
27 11th annual EY/IIF global bank risk management survey Resilient banking | EY
There has been a sense of inevitability that it channels were preferred by millennials and
will move from being the actions of a few to Generation Z, customers continued to go
an industry-wide transformation. It seemed to into branches and high-net-worth investors
be a question of when, not if. still liked visiting private banks. The entrance
of large technology players into financial
What no one knew was what was going to be services and the ascendency of FinTechs were
the catalyst for widespread or accelerated expected to push the industry to transform.
change. Notwithstanding evidence that digital
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Weaknesses in core systems may have Figure 17: Areas where senior management will accelerate digital transformation
been known prior to COVID-19, but those
deficiencies became critical roadblocks as
banks weathered through. The business case
for change became much more compelling,
Process automation (including intelligent automation) 88%
especially as banks realized customers and
clients quickly got much more accustomed
to digital channels to access services and the Modernizing core functions/platforms 66%
“
Technological modernization and transformation accelerated significantly during the pandemic, so risk management needs to catch up to the pace of change.
– Yang Shim, EY Global Financial Services Technology Consulting Leader
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32%
39%
46%
79% 53%
56%
74%
Automating manual Enhancing analytics on Improving risk assessment, Using advanced analytics Building scenario analysis Enhancing real-time Accelerating
processes risk/portfolio analysis and approvals processes, in risk reporting to identify emerging risks surveillance onboarding approvals
of new digital products and
services
Bank CROs point to myriad reasons why CROs are not simply spectators to technology management stand a better chance of driving Of course, just because the case for digital
digital transformation is being accelerated, transformation. They highlight a number of down costs, while improving and extending transformation has been strengthened,
but chief among them (for 60%) is support areas where they expect to accelerate digital their performance and value-added activities. doesn’t mean change has become easier.
for a more efficient operating model. Meeting transformation of risk management, as While CROs cite a range of constraints, such
customer expectations, enhancing their shown in Figure 18. Risk in some ways is still playing catch-up as a lack of relevant technology expertise,
experience and addressing their differing with the rest of the organization. COVID-19 integrated risk platforms or relevant change-
preferences are also drivers of change. As elsewhere, the top area of focus is changed many banks’ strategic initiatives management expertise, the two primary
Indeed, one CRO noted, “Customers are very automation. But portfolio analysis, risk and capital investments to accelerate constraints are budgetary and the scale of
positive about automation. For them, the assessments, risk reporting and scenario digital transformation. As one CRO put change required (both 67%).
end-to-end customer journey and experience analysis are expected to be transformed, it, “Risk management has to respond
has improved.” among other areas. Certainly, early accordingly to ensure we are staying on top
movers in transforming the practice of risk of rapid deployment.”
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Managing risks of cloud migration Figure 19: Level of confidence management processes are properly
integrated in cloud strategy
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
It has become increasingly apparent that • Applying the risk appetite and tolerance Threat and vulnerability management
digital transformation and the move to framework to cloud programs and
Security operations management
public cloud go hand in hand. Legacy implementations (34%)
systems cannot deliver the flexibility and • Adapting the culture of the risk and Availability and capacity management
functionality required, and certainly not compliance functions to rapid innovation
for the same cost. and business-driven transformations Legal/regulatory management
through cloud technology (34%)
Data protection/privacy
However, concerns linger as to how banks
properly and safely migrate to public cloud. Back in the 2019 EY/IIF survey, CROs Infrastructure asset management
Publicized security failures or service expressed real concerns that banks’ move
outages associated with major cloud to cloud was not being well integrated with Business continuity/disaster recovery
providers only exacerbate such concerns. existing processes. Two years on, those Identity and access management
concerns remain. As shown in Figure 19,
CROs point to a number of concerns, CROs have a fairly low level of confidence System development and development operations
including: that a broad range of management
IT operations
processes are well integrated within their
• Security risk capabilities across both on- organization’s cloud strategy. Third-party management
premise and cloud environments (59%)
• Adapting current risk capabilities to Change and configuration management
address cloud risks (46%)
“
Cloud has been at the center of the sector’s accelerating transformation through the pandemic, and the biggest risk with cloud now is the business and strategic
risk of not adopting it. – Brad Carr, Managing Director, Digital Finance, IIF
Figure 20: Current and future use of ML and AI Figure 21: Coverage of risks by existing governance processes
Improved controls in marketing materials 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Not using now Using now Will use much more in 5 years Not covered Covered, but not adequately Adequately covered
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Whether the disruption was severe weather, to a prolonged period of working from home.
power outages or local unrest, firms have Employees with care or parental obligations
typically been well placed to reach out to had to prioritize those with work and, as
employees and support them in adverse a result, employers had to be supportive.
situations. Prolonged periods of isolation or lack of social
interaction, coupled with more intense virtual
But COVID-19 elevated employee well-being workplaces and oftentimes longer hours, as
to a whole new level. Suddenly, work, home well as the disease itself, brought forward real
and family collided, as most of us transitioned concerns about physical and mental health.4
4 - For example, in the US, 44% of employees reported their mental health had declined as a result of COVID-19
(see How do you ensure wellbeing is at the core of workforce resilience? | EY - US).
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Challenges in moving to a
sustained hybrid working model
Figure 22: Top concerns in protecting employee well-being and health It has become increasingly apparent that controls with sustained work from home”).
and safety on an ongoing basis employees will not return to work in the Beyond issues related to a hybrid working
manner prior to COVID-19. During the approach, CROs are focused on a broader set
pandemic, work transitioned from a place to of challenges with protecting employee well-
Maintaining connectivity and collaboration 57% an activity, which can be performed outside being and health and safety on an ongoing
the walls of a traditional workplace. Although basis, as shown in Figure 22.
challenges remain, employees have generally
Employee burnout/fatigue 55% enjoyed some of the changes brought by Notwithstanding the implementation of a
working from home, including more time with range of virtual collaborative tools at work,
Employees being able to manage work/ family, increased flexibility and the ability to CROs worry that connectivity and collaboration
life commitments, (e.g., school closures, 47% work from virtually anywhere. While there is has been permanently degraded by the
homeschooling children, caring for elderly pent-up demand to get back to the physical virtual work environment. Not only could
family members) workplace sometime, few employees want this slow innovation, but it could reduce
to return to the office five days a week. We opportunities to collaborate outside of silos
Maintaining productivity 40% all expect a hybrid work model to become and across teams and for real-time control
standard, with some days at the office and oversight and monitoring.
others at home.
Ensuring a safe and healthy workplace 36%
CROs are also increasingly concerned about
CROs raise a number of concerns related employee burnout. Working from home may
Impacts of self-isolation and quarantine on 34% to sustaining a hybrid workplace, notably reduce the need to commute, but for many it
mental health maintaining the firm’s culture, behaviors and has made work more demanding, especially
values (55%), employee engagement (47%), as boundaries between work and home life
Employee data security and privacy 28% employee productivity (33%), information have been eroded. The “always on the clock”
security (31%) and a robust control working style is taxing.
environment (29%). (See “Maintaining
36 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Maintaining controls with sustained work Figure 23: Level of concern about risks associated with remote working
Low level of concern
CRO concerns associated with remote Inability to recover operations after a cyber attack
working are varied, as shown in Figure 23. 70%
Manipulation of data
Destruction of data
90%
100%
37 11th annual EY/IIF global bank risk management survey Resilient banking | EY
A sustained hybrid working model presents real For senior leaders who grew up in financial
cultural challenges. We have all experienced services, the new model is particularly
how hard it is to properly integrate new challenging. They have deep concerns that
employees who we have never met in person, the apprenticeship model in which they grew
to build rapport with new customers and and prospered is hard to replicate in a hybrid
clients, and to foster a common ethos and environment.
culture of work, collegiality and inclusiveness.
38 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Figure 24: Top risks in maintaining a common culture in the ‘new normal’ In the context of transitioning to a new model
for work, CROs cite a list of risks in maintaining
a common culture. About three-quarters are
worried about the erosion of the corporate and
Erosion of corporate and employee community 74% employee community with reduced face-to-face
with reduced face-to-face interaction interaction (see Figure 24).
Boundaries being blurred continually between being 48% Not surprisingly, banks are considering a
physically in the office and working remotely number of ways to build a more positive
culture and ways of working, as shown
Reduced opportunities for collaboration 45% in Figure 25. Some firms are moving
away from management by observation
Challenges in onboarding new employees
to managing performance based on
41%
outcomes. This calls for organizations
to define clear success criteria so that
Reduced levels of colleague empathy due to 28% individual performance assessments are
reduced face-to-face interaction fair and equitable. Also, the voice of the
employee has to be systematically solicited,
Less mentorship 21% understood, monitored and measured as a
key metric for company culture.
Reduced focus on talent development 14% Banks are considering the most effective
ways to monitor culture in the future,
Perceived lack of organizational empathy
including:
10%
for employee concerns
• More routine employee surveys, e.g.,
Failure to attract new skills 10% “pulse” surveys (69%)
• Monitoring control and risk metrics, e.g.,
broken risk limits and compliance
Reduced levels of employee trust 5% issues (38%)
• More routine use of focus groups or
interview-based inquiries (36%)
39 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Establishing an open environment Developing a risk culture that Building an enterprise view of risk Cultivating transformative leaders
that encourages employees to supports business strategy/growth versus siloed views of risk
proactively identify/escalate risks
Shifting perception of risk Moving to an agile and iterative way of Implementing an effective diversity and
management as a hurdle to progress working versus a traditional “waterfall” inclusion (D&I) strategy (e.g., to mitigate
to one of enabling innovation/growth approach (i.e., one based on a risk of unconscious biases in hiring,
sequential step-by-step approach) developing and retaining personnel)
“
Taking a disciplined approach to defining, implementing and
reinforcing corporate culture will be a defining factor of success as we
“
The pandemic dramatically changed how we work, manage risk and protect
employees’ well-being. Both employers and employees have had to adapt
all work in a hybrid working model. – Heidi Boyle, EY Americas Banking & to once-unthinkable circumstances. The future is still uncertain, but it’s
Capital Markets People Advisory Services Lead encouraging to see this culture of resilience and flexibility. – Clay Lowery,
Executive Vice President, Research and Policy, IIF
40 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Implementing a successful diversity, equity Figure 26: Top risks in implementing the banks’ diversity, equity and inclusion strategy
and inclusion strategy
The events of the last 12 months in the US and globally Focusing on only a few dimensions of diversity
related to racial inequity have shocked the world into (e.g., gender, ethnicity) and not including the full breadth 52%
(e.g., veteran status, disability, neurodiversity)
action. Prior to COVID-19, banks, like other companies, had
implemented diversity and inclusiveness strategies, with a
major focus on gender parity – and were beginning to make Getting too focused on the statistics and not on core issues
some headway. But the heightened focus on racial, as well 50%
of equality, equity and a sense of belonging
as gender, equity illustrated that such programs were not
as broad as they should be, nor, frankly, achieving many
of the desired outcomes. The fact that COVID-19 had a Not providing clear behavior change programs
41%
disproportionately negative effect on women and to drive the “inclusion” component of D&I
minorities escalated the need for firms to drive urgently
for better outcomes.
Not having sufficient understanding of what’s
40%
needed to be successful in your D&I strategy
COVID-19 also broadened the concept of inclusiveness and
belonging. Being and feeling included is a fundamental
need of every employee, but delivering on that promise Employee perception that you are progressing too slowly 36%
on an ongoing basis in a complex work environment is
highly challenging – even more so in a virtual environment.
Yet, employee engagement has a direct link to employee Using the wrong metrics to track progress thereby not
providing the appropriate insight to inform the D&I strategy 29%
satisfaction and performance, and talent retention.
Like their executive peers, CROs are highly supportive of Not being able to sustain the level of effort required
efforts to enhance diversity, equity and inclusion, both 22%
to drive material change
within risk management and across the organization.
But they are open to acknowledging getting this right
will be difficult and they identify a number of risks their External perception that you are progressing too slowly 17%
organizations will face in being successful in their efforts,
as shown in Figure 26.
Lack of committed resources 16%
41 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Not a week goes by without another global Yet, for all the recent activity and necessary
initiative being launched, a major investor urgency around ESG risks, they are not new
calling for change or a regulator announcing issues. At least since the 1990s, boards have
a new effort or area of focus. It’s hard to invested time and attention considering the
keep up. Increasingly more bank executives day’s issues, from environmental disasters,
are concluding, as one CRO put it, “Climate to human rights and labor practices, to board
change is one of the major risks banks independence and leadership.
will have to deal with in the future. The
pandemic accelerated the general public’s What has changed is the breadth of issues
acknowledgment of this particular risk.” and their centrality to corporate purpose and
strategy, and the need to adapt quickly and
The heightened focus on climate has greatly meaningfully to shifting societal issues
elevated the discussion on environmental, and priorities.
social and governance (ESG) matters.
42 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Sustainable finance
An opportunity of a generation
The EY organization defines this as any form Embedding ESG concepts into investing is
of financial service that incentivizes the perhaps the highest-profile manifestation
integration of long-term ESG criteria into of sustainable finance. This has expanded
business decisions, with the goal of providing to include ESG factors in stock selection, as
more equitable, sustainable and inclusive well as using ESG to inform which companies
benefits to companies, communities and investors should push for enhancements to
society. It is increasingly clear that there can their ESG approach. But sustainable finance
be no effective transition to a greener or fairer extends well beyond ESG funds. A diverse
economy without the active engagement range of ESG products and services are now
and leadership of the entire financial services available, including bonds (of many types),
sector. 5 green retail products (e.g., green mortgages,
credit cards) and insurance products.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Green/social bonds
Infrastructure financing
ESG-related investment funds
Sustainability-linked corporate loans
Securitized green/social bonds
Green mortgages
Green commercial real estate portfolio
Green retail loans
Lending to most affected sectors
ESG data products
Checking accounts/credit cards
The growth potential is enormous. On the for expansion remains significant. On the CROs are increasingly aware of the commercial funds and sustainability-linked loans have
investment side, as of two years ago, bond side, the room for growth is even opportunities, in part because of their work significant growth potential, but they freely
investments influenced by ESG factors starker; the universe of ESG-labeled bonds in analyzing the impact of climate risk on admit there are many opportunities that they
totaled US$32t in key markets; albeit this is has grown to US$1.3t in 2020, up from just their bank’s investment portfolios and assets. have only partially analyzed, if at all.
a large pool of assets in those markets, it is US$15b a decade earlier, according to the
only about a third of the total.6 IIF. That figure represents only about 1% However, as shown in Figure 27, banks have
of the global bond market.7 So far, financial a long way to go in properly analyzing market
Since then, ESG-related assets have grown services firms have only greened the fringes potential. CROs may instinctively know
especially during COVID-19, and the scope of global finance. green bonds, infrastructure financing, ESG
A fifth of CROs note their banks have not Figure 28: Factors limiting growth of ESG-related opportunities
systematically evaluated ESG opportunities,
so they do not have an informed view
of the obstacles to capitalizing on those
opportunities. Of the banks that have done
some analysis, they identify a number of 59% 46% 43%
factors limiting growth, such as lack of
data, industry standards and agreed-upon
methodologies, as shown in Figure 28.8
Lack of necessary data Lack of clarity of Lack of agreed industry
Banks that have done their homework have regulatory/supervisory methodologies
made bold commitments to sustainable expectations
finance, often expressed in terms of aggregate
financing commitments to be achieved by
2030 (in line with the timeline in the Paris
Agreement) or commitments about the firm’s 26%
37% 31%
own sustainability practices and those of their
vendors. Half of the banks that participated in
this survey have made their commitments a
strategic imperative for their organization and Lack of standardized industry Lack of customer/client Lack of necessary skills
just over two-fifths (44%) have built them into framework(s) demand in sustainable finance
business-line strategies.
The governance of ESG – or more broadly, risks (e.g., the impact of climate change set of governance mechanisms in place in • Activities undertaken with regard to
sustainable finance – is evolving quickly, as on the firm’s risk profile and its assets and their organization, as shown in Figure 29, commitments to initiatives such as the UN’s
befits the increased importance of these issues. liabilities); the compensation committee including the discipline created by board and Principles for Responsible Banking or its
needs to oversee talent and diversity, equity management committee oversight, internal Net-Zero Banking Alliance
At the full board level, the discussion has and inclusion efforts; and the governance management reporting and embedding • Governance, strategy, risk management
expanded to consider how sustainable committee has to embed ESG matters into ESG into the enterprise risk management and metrics associated with climate risk,
finance is at the heart of the bank’s long- director selection. approach. notably through the use of the standards
term strategy and aligned with purpose and promulgated by the Taskforce on Climate-
community engagement. The commercial Management, too, is evolving its approach External disclosure is viewed as important Related Financial Disclosures (TCFD) 9
strategy behind sustainable finance has to sustainable finance. It has shifted from in terms of driving broader accountability.
increasingly become a more routine topic. being a niche commercial area or one led Increasingly, banks are making disclosures Bank CROs acknowledge there is scope
At the board committee level, some by a siloed corporate social responsibility related to their: to improve their bank’s ESG disclosures,
firms have broadened the scope of their executive and reporting team to an with over half (53%) saying that, while the
governance committee or established new enterprise-wide strategic initiative, overseen • Overall sustainability strategy, governance disclosures are well developed, they are in
committees focused on ESG or corporate by a cross-functional, high-level steering and approach, and progress in achieving need of enhancement. Over a third believe
social responsibility. However, the breadth committee and a senior executive (often with disclosed goals and objectives their disclosures are not yet fully developed
of issues means ESG governance spans other the title of chief sustainability officer or head • Financial or outcome-based commitments and need even more enhancement.
committees – the audit committee has to of ESG) who has the ear of the CEO. to sustainable finance and progress in
consider disclosures about ESG, especially achieving those goals (sometimes linked
those linked to financial statements; the This diversity in governance approach can to the 17 United Nations (UN) Sustainable
risk committee has to consider associated be seen in the survey. CROs identify a broad Development Goals)
9 - See the TCFD Playbook by EY, IIF and the United Nations Environment Programme Finance Initiative: Task force on Climate-related Financial Disclosures report playbook | EY - Global
46 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Our approach to ESG ESG is overseen by ESG is part of our firm’s ESG is embedded in our
is disclosed to external our management risk risk culture loan decisioning processes
76% stakeholders (e.g., in our 66% committees 55% 48% (e.g., originations and
sustainability report, annual monitoring)
report, risk filing, etc.)
Designated line-of-business Internal reporting The board of subcommittee ESG is overseen regularly
senior executives are processes are in place charter includes specific by our full board of
45% accountable for ESG 43% around ESG 41% reference to ESG 40% directors
The board has a We have a risk appetite Our board of directors has ESG is incorporated in our
subcommittee focused statement and related approved our risk appetite compensation programs
33% on ESG 24% metrics for ESG 16% statement and related 9%
metrics for ESG
47 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Increasing awareness about the risks, as well change varies across the industry. Banks
as regulatory pressure on banks to analyze have or are developing approaches to:
effects of climate change on their strategies,
operations and customers, is pushing banks • Identify material climate-change risks on
to enhance the risk management coverage an ongoing basis (58%)
of climate. Large global banks have started to • Assess the impact of climate change on
establish standalone climate risk teams under expected credit losses (49%)
their CROs. Most others are not quite that • Quantify the potential capital impact of
advanced, as yet. climate-change risks (40%)
Given there’s no industry model for how to CROs emphasize the importance of some
embed climate risk into risk management, of these new analytical approaches. As one
banks have taken an array of approaches to said, “Close monitoring of how portfolios are
doing so, as shown in Figure 30. The more built, especially on the credit side, will be
common is including climate in their scanning critical as clients might suffer from transition
of emerging risks – this was the case at the risk (albeit more difficult to assess). This
time of our last survey. But, increasingly, banks will lead to more stringent client selection
are analyzing the impact of climate change on processes.” Another CRO highlighted the
material credit exposures, embedding it into need to be practical at these early stages of
the enterprise risk taxonomy and developing development, “For our initial climate change
policies for the most impacted businesses. stress testing, the approach was rather
pragmatic, e.g., sector average, because
Progress on conducting scenario and customer-specific data is hard to get.”
financial analysis on the impact of climate
48 11th annual EY/IIF global bank risk management survey Resilient banking | EY
Indeed, this later perspective highlights that, in Figure 30: Ways to incorporate climate risks into banks’ risk management activities
practice, banks still have a long way to go to mature
their ability to assess physical and transition risk
exposures: just over half (54%) have a preliminary Climate-change risks are included in 72%
understanding of their climate-change risk exposure our scanning of emerging risks
and about a quarter (28%) have a somewhat Climate-change risks inherent in our 48%
complete understanding. Most of the remaining material credit exposures are assessed
banks lack an understanding of the risks, but intend
to assess them in the future (19%). Climate-change risks are embedded 45%
in our risk taxonomy
“
Policies are in place for areas of our 43%
business impacted by climate change
Climate change is now top of banks’ Climate-change risks are embedded in our 43%
agendas. Stakeholders expect banks to enterprise risk management (ERM) framework
“
We have enterprise-level climate-change 26%
risk metrics
New risk drivers like climate change We quantitatively assess the potential impact 26%
require banks to reconsider and reconceive of physical risks related to climate change
traditional risk management parameters - Climate-change risks are embedded in our 24%
risk appetite framework
but also pose challenges due to their long
time horizons and uncertain nature. Business lines track climate-change risk metrics 21%
specific to their activities
– Sonja Gibbs, Managing Director and Head of
Controls are in place to monitor 12%
Sustainable Finance, Global Policy Initiatives, IIF climate-change risks
49 11th annual EY/IIF global bank risk management survey Resilient banking | EY
COVID-19 has made it hard to look beyond immediate and to better manage the risks associated
with climate change for the institution and
and effectively, and to enable new ways of
working that provide employees with much-
priorities and issues. Adapting to a virtual working the financial system at large. Technological cherished flexibility.
transformation has accelerated, bringing
environment and managing conflicting personal and with it a host of new and complex risks. Second, COVID-19 expanded the
vocabulary of resilience. Financial resilience
work commitments has called on everyone to be more In our 10th annual survey in 2019, we was well known, as was increasingly
highlighted that managing through longer- operational resilience. But we quickly got
flexible and resilient. term risks would be the true test of survival accustomed to asking how resilient our
for banks globally. If anything, COVID-19 has new transformational technologies can and
amplified this viewpoint. should be, how resilient our workforce is and
Risk priorities have shifted significantly. their economies. Meantime, banks’ systems how financial services supports and enables
Financial and operational resilience have had to sustain a year or more of virtual But, COVID-19 added two new dimensions. long-term societal resilience.
dominated the agenda during the pandemic. working and digital access for customers to First, it reminded us of the opportunities.
While banks came into the crisis well services and products. For example, sustainable finance offers So, it is not simply whether banks have the
buttressed by large amounts of capital significant – perhaps once in a generation steel to survive challenging new risks, but
and liquidity, the scale of economic impact Climate change has caught the attention – commercial opportunities for banks and whether they have the ongoing resilience
globally has been unprecedented and of everyone and the financial services other financial institutions. Technological to do so, while capturing the opportunities
concerns remain about the patchy state of sector is being called upon to catalyze and transformation creates opportunities to offered by change. Resilience, then, will be
economic recovery. New waves of COVID-19 incentivize their customers and clients to deliver added and more tailored value to a defining characteristic of success over the
continue to stall countries’ effort to open up transition to a zero- or low-carbon economy customers, to operate more efficiently next decade or more.
50 11th annual EY/IIF global bank risk management survey Resilient banking | EY
13% 8% 5% 3% 2%
19% 8% 8%
29% 11% 37%
16% 34%
23%
52%
21% 19%
61% 35%
18%
24%
23% 31%
North America 1 Yes, domestic SIFI US$100 billion to US$499 billion Universal bank
Europe 2 to 3 Yes, global SIFI Under US$100 billion Primarily retail and corporate banking
Sub-Saharan and Middle Above 50 US$2 trillion or more Wealth management/private bank
East/North Africa
52 11th annual EY/IIF global bank risk management survey Resilient banking | EY
EY Claudia Gómez
claudia.gómez@co.ey.com
Yoshio Wagoya
yoshio.wagoya@jp.ey.com
Max Weber
max.weber@de.ey.com
IIF
+57 14847164 +81 3 3503 1110 +49 711 9881 15494
Global Andrés Portilla
Mario Schlener Christopher Woolard
mario.schlener@ca.ey.com
EMEIA christopher.woolard@uk.ey.com
Managing Director, Regulatory Affairs
Jan Bellens (Europe, Middle East, India, Africa) Washington, D.C.
+1 416 932 5959 +44 20 7760 8166
EY Global Banking & Capital Markets Leader aportilla@iif.com
Office: +973-33561177
jan.bellens1@ey.com Frank de Jonghe +1 202 857 3645
Mark Watson
+1 212 360 9098 mark.watson@ey.com frank.de.jonghe@be.ey.com
+32 2 774 9956 Martin Boer
+1 617 305 2217
Sonja Koerner Director, Regulatory Affairs
EY Risk Transformation Leader, Banking Dusko Dincov Washington, D.C.
& Capital Markets Asia-Pacific dusko.dincov@bh.ey.com mboer@iif.com
skoerner@uk.ey.com +973 33561177 +1 202 857 3636
+44 20 7951 6495 Eugène Goyne
eugene.goyne@hk.ey.com Federico Guerreri Stefan Gringel
+852 2849 9470 federico.guerreri@it.ey.com Policy Advisor, Regulatory Affairs
Americas +39 335 1230044 Washington, D.C.
Maggi Hughes sgringel@iif.com
Tom Campanile maggi.hughes@sg.ey.com Idelia Hoberg +1 202 682 7456
thomas.campanile@ey.com +65 6309 8268 idelia.hoberg@za.ey.com
+1 212 773 8461 +27 66 487 0401
Doug Nixon
Marlene Devotto douglas.nixon@au.ey.com John Liver
marlene.devotto@cl.ey.com +61 2 9276 9484 jliver1@uk.ey.com
+56 229162752 +44 20 7951 0843
David Scott
Adam Girling david.scott@hk.ey.com Ivica Stankovic
adam.girling@ey.com +852 26293070 ivica.s@kw.ey.com
+1 212 773 9514 +965 22955056
53 11th annual EY/IIF global bank risk management survey Resilient banking | EY
About EY What makes EY distinctive in financial services About the Institute of International Finance (IIF)
EY exists to build a better working world, Over 84,000 EY professionals are dedicated to financial services, The Institute of International Finance (IIF) is the global association
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© 2021 EYGM Limited. and foster global financial stability and sustainable economic
All Rights Reserved. growth. IIF members include commercial and investment banks,
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strategy, tax and transactions, EY teams ask The views of third parties set out in this publication are not
necessarily the views of the global EY organization or its member
better questions to find new answers for the firms. Moreover, they should be seen in the context of the time they
complex issues facing our world today. were made.