After boosting capital and liquidity, financial institutions (FIs) must now contend with the many nonfinancial risks arising around the globe.
More than 10 years after the global crisis, large institutions have shored up capital and liquidity, new rules have been implemented and supervision has tightened. Yet, business and operating models, and the environment in which FIs operate, are changing. As a result, new risks are moving up the agenda: operational and technical resilience are increasingly in focus, as are questions about the sustainability of business models and the risks of exogenous factors such as climate change and geopolitical volatility.
On 16 and 17 of October in Washington, D.C., bank and insurance directors, executives, regulators, and other subject matter experts met for the 2019 Financial Services Leadership Summit to discuss these issues. Five key themes emerged:
- The post-crisis regulatory regime may soon be tested
- Cyber and technology risks are testing systemic resilience
- The need to build sustainable, responsible financial institutions
- Traditional business models face disruption
- Risk governance is evolving in a changing risk landscape
Theme #1: The post-crisis regulatory regime may soon be tested
Summit participants expressed confidence that the regulatory reforms of the last decade have addressed some of the most critical sources of financial risk to the system. They worry, however, that complacency may set in, given the period of relative calm and macroeconomic growth since the global financial crisis. They also worry that the nature of risks to the system are changing in ways that will make it difficult for regulators to respond effectively.
In a recent speech, Wayne Byres, chairman of the Australian Prudential Regulation Authority and former secretary of the Basel Committee on Banking Supervision, said, “The current regulatory framework is not designed for clouds, ecosystems or partnership models. Not only do we need new skills, additional resources and stronger partnerships, but potentially new powers to ensure that as critical functions and data move outside the regulatory perimeter, we are able to satisfy ourselves that the requisite level of safety and control remain in place."1
Participants agreed that large financial institutions are now better equipped to weather a financial shock, but they cautioned that reforms have largely gone untested—and now the prospect of a downturn looms in many economies. Meanwhile, the low (or negative) interest-rate environment in several major economies has left monetary policymakers with little room to maneuver. It’s also putting pressure on earnings at incumbent financial institutions already dealing with low growth.
Other risks lurking in the industry include the rise of shadow banking, which participants said is not well understood or under control. Moreover, new FinTech and InsurTech firms, as well as large technology companies, may also present new sources of risk.
Participants also pondered if organizations such as the Financial Stability Board, the Basel Committee on Banking Supervision, and the International Association of Insurance Supervisors could coordinate a response to a future crisis as effectively as they did a decade ago. Given the current geopolitical environment in which nationalism and regionalism are resurgent, this kind of coordination is difficult to envision, they said.