Question

b. Evaluate possible structural trends that will affect banks risk management in the future and their implications.

Answer 1

Sol: Six trends will affect bank risk management in future:

Trend 1:Regulation will continue to broaden & deepen

While the magnitude and speed of regulatory change is unlikely to be uniform across countries, the future undoubtedly holds more regulation both financial and non-financial even for banks operating in emerging economies.This tightening regulatory environment will unviably make the traditional model to manage regulatory risks; the risk function will need to build even more robust regulatory and stakeholder-management capabilities.

Trend 2:Customer expectations are rising in line with changing technology

Technological innovation has ushered in a new set of competitors: financial-technology companies, or fintechs. They do not want to be banks, but they do want to take over the direct customer relationship and tap into the most lucrative part of the value chain  origination and sales.Technology will enable banks and their competitors to offer increasingly customized services. It may be possible eventually to create the “segment of one,” tailoring prices and products to each individual. This degree of customization will prove  expensive for banks to achieve because of the complexity of supporting processes. Regulatory constraints might well be imposed in this area, however, to protect consumers from inappropriate pricing and approval decisions.

Trend 3:Technology and advanced analytics are evolving

Technological innovations continuously emerge, enabling new risk-management techniques and helping the risk function make better risk decisions at lower cost. Big data, machine learning, and crowdsourcing will be the potential impacts.They may expose institutions to unexpected risks, posing more challenges for the risk management in the future.

Trend 4:New risks are emerging

Inevitably, the risk management will have to detect and manage new and unfamiliar risks over the next decade. Model risk, cybersecurity risk, and contagion risk are some examples that have emerged.To prepare for new risks, the risk-management function will need to build a perspective for senior management on risks that might emerge, the bank’s appetite for assuming them, and how to detect and mitigate them. And it will need the flexibility to adapt its operating models to fulfill any new risk activities.

Trend 5:The risk function can help banks remove biases

Biases are highly relevant for bank risk-management functions, as banks are in the business of taking risk, and every risk decision is subject to biases. A credit officer might write on a credit application, for example, “While the management team only recently joined the company, it is very experienced.” The statement may simply be true or it may be an attempt to neutralize potentially negative evidence.The risk function could take this lead in de-biasing banks. It could even become a center of excellence that rolls out de-biasing processes and tools to other parts of the organization.

Trend 6:The pressure for cost savings will continue

The banking system has suered from slow but constant margin decline in most geographies and product categories. The downward pressure on margins will likely continue, not least because of the emergence of low-cost business models used by digital attackers. As a result, the operating costs of banks will probably need to be substantially lower than they are today. As the pressure to reduce costs will persist, the risk function will need to find further cost-savings opportunities in digitization and automation while delivering much more for much less.