Growing demands of regulators and more are changing the face of the chief risk officer.
Banks worldwide are making major changes to their organisations and operating models driven by the pressure to perform and the opportunities provided by new technology.
There are key risk challenges affecting the industry and the priorities for change identified by bank risk functions over the next five years.
In addition, according to PwC’s ‘Risk Management 2025 and Beyond’ report, this is leading to an evolution of the chief risk officer role. The study interviewed 80 representatives from 60 international banks, including 17 from Africa, and evaluated 1,500 data points.
Jacques Muller (pictured), PwC Africa’s financial services risk and regulation leader said, “The Covid-19 pandemic and related economic uncertainty have generally been well managed by the banking sector. Risk functions are becoming more dynamic and flexible and increasingly contribute to leading banks through a complex and volatile landscape of opportunities and threats.”
He added, “Risk officers and their teams are developing innovative approaches to react to emerging thematic risks and increasing their focus on cyber risks, fraud, money laundering, and ESG matters. The rapidly evolving risk landscape necessitates new mindsets and approaches to staff development and prioritisation of investments in new capabilities.”
The Covid-19 pandemic has raised the profile of resilience as banks recognise it’s no longer an option but a necessity, according to Jacques.
“Globally, and locally, we are also seeing a call from regulators to take action by putting this issue on par with their ability to handle financial stresses,” he said.
One of the key challenges to building resilience cited by banks was a lack of awareness about operational resilience and its connection to existing business practices. Strong governance, clear accountability and consistent definitions are essential to push ahead with efficient programmes and processes for building a resilient organisation.
Key priorities of change for banks over the next five years are:
- Interlocking risk and business transformation: Bank business models continue to evolve and risk functions acknowledge the need to pivot their skills, capabilities and infrastructure. Payments and transaction banking are the business areas expected to undergo significant change over the next decade. This is followed by retail and commercial lending. While efficiency continues to be important, material cost reduction is not on the agenda for the majority of risk functions in the immediate term.
- Moving from analogue to digital – unfinished business concerning non-financial risks: There are significant differences in organisation maturity and ambition around non-financial risks (cyber, information technology, third party/outsourcing, etc.) and the interaction model between risk and compliance remains a complex area requiring further thought for most banks in the context of managing non-financial risks.
- Preparing for climate change: The enormity and uncertainty surrounding evolution of the climate agenda makes it particularly challenging. There is a need to establish effective frameworks and operating models to track and act on diverse data sources both for better risk management as well as a potential competitive advantage. Most institutions have started multi-year programmes in response, looking at this as a joint challenge across strategy, business and risk.
- Building on the lessons from Covid-19: The pandemic was the first large-scale test of operational resilience. Despite the challenges of tens of thousands of staff across the value chain moving to remote working, most participants in the study were able to maintain major operations without many significant incidents. There are a number of learnings from the crisis that are expected to shape scenario analysis design and frequency, change delivery and data driven decision making.
- Preparing for the next decade of operational resilience: Banking resilience is emerging as the second key trend (next to sustainability) that will require continued focus from the industry over the next 10 years.
- Seizing upon the advent of true automation: Banks are increasingly relying on big data, artificial intelligence (AI) and machine learning to control and reduce risks. There has been considerable investment in building self-service analytics platforms and making these available to staff to provide more effective capabilities and potentially reduce cost at the same time. Much of the adoption is being driven organically within institutions where analytics and data science teams are beginning to emerge within risk functions.
- Managing the generational workforce transition: Risk professionals with a very different background will be required to deal with newly emerging risks, with an affinity for data and technology being critical. Leadership models and career pathways will have to evolve to cater to the differing expectations of millennials with a general sense of the growing importance of work-life balance and that career journeys may need to be structured such that they include positions in multiple parts of the firm.