- 90% of Asia-Pacific banks’ chief risk officers (CROs) surveyed view climate change as the top emerging risk in the next five years
- Climate change, credit and cybersecurity risks are the three top issues garnering surveyed Asia-Pacific banks’ CROs’ immediate attention over the next 12 months
For the first time, climate change tops the list of both long- and short-term risks for Asia-Pacific banks, according to the 11th EY and Institute of International Finance (IIF) bank risk management survey, Resilient banking: Capturing opportunities and managing risks over the long term.
Nine in 10 (90%) Asia-Pacific bank CROs surveyed view climate change as a top long-term emerging risk over the next five years – up from 59% in 2019. While this is consistent with the global result of the survey (91%), it appears Asia-Pacific bank CROs are even more focused on climate change in the near term with 100% viewing it as a top risk, requiring their urgent attention over the next 12 months. This compares to just 49% of CROs globally who view it as a top short-term priority.
The survey of 88 financial institutions across 33 countries, including banks headquartered in Asia-Pacific, provides a window into the changes in risk management seen globally and regionally during the past decade, and examines the major risks anticipated over the next 10 years.
David Scott, EY Asia-Pacific Financial Services Risk Management Leader says: “Climate change has climbed to the top of Asia-Pacific banks’ short- and long-term risk agendas for the first time since we began this survey over a decade ago. The greater immediacy that Asia-Pacific banks’ CROs are placing on climate change risk over the next year, compared to the global average, reflects the urgency that regulators across the Asia-Pacific region have placed on climate risk management capabilities, as well as a heightened focus by investors and shareholders on disclosures.”
The survey finds that Asia-Pacific banks in practice are still maturing in their ability to assess physical and transitional risk exposures and that sourcing and managing climate risk-related data remains a challenge. While 80% of surveyed Asia-Pacific banks’ CROs report having a preliminary understanding of their climate change risk exposure, just 20% say they have a somewhat complete understanding.
Joazral Yusof, Partner, Ernst & Young Consulting Sdn Bhd echoes, “Similarly in Malaysia, climate change risk continues to be a key area of focus of CROs. Driven by increased regulatory focus and expectations, many financial institutions have begun to integrate environmental, social and governance (ESG) principles into their strategy and risk management practices. The issuance of the Climate Change and Principle-based Taxonomy by Bank Negara Malaysia earlier this year has provided a common framework for the classification of climate risk-related exposures. More recently, the Malaysian Code on Corporate Governance updated by the Securities Commission has proposed that boards and senior management be evaluated on how well they manage sustainability risks and opportunities. As such, it is critical for financial institutions to keep pace and continue to build the right capabilities and capacity required to successfully implement ESG strategies and risk management.”
Aside from climate change in the top position, not surprisingly resilience factors which have been amplified by the COVID-19 pandemic are leading the risk agenda for Asia-Pacific banks’ CROs. Cybersecurity is perceived by CROs as the second most urgent risk in the region over the next 12 months (89%), followed by credit risk linked to economic uncertainty (67%) at number three. This near-term regional priority order also differs from the global results. Globally, 98% of CROs believe credit risk will be the number-one concern for banks over the next 12 months, amid the continuing global economic recovery from the COVID-19 pandemic, with cybersecurity following at 80%.
Andrés Portilla, Managing Director, Regulatory Affairs at the IIF, says: “While cybersecurity has long been the leading immediate concern for CROs, the COVID-19 pandemic changed the game. The breadth and depth of the pandemic’s shock to the global economy has brought credit concerns to the forefront for banks over the next 12 months.”
The COVID-19 crisis also proved to be an unprecedented and unexpected test of banks’ risk management. Thankfully, for the most part, the banking sector found that its decade-long effort to build greater and higher quality capital and liquidity has paid off. Greater technological resilience also came about as a result of banks accelerating their digital transformation in light of the pandemic.
Douglas Nixon, EY Asia-Pacific Banking and Capital Markets Consulting Leader says: “The COVID-19 pandemic has shown just how quickly things can change, but it’s also shown us the agility of the banking sector in times of crisis. It’s clear that banks, both regionally and globally, may have to contend with persistent and dynamic disruption not just today, but tomorrow and into the future, and it’s vital they remain resilient to all forms of risk – existing, new and emerging. Over the next decade, the crossover between talent, data and technology may be at the front of Asia-Pacific banks’ ability to survive new challenges and continue to thrive.”
Additional key survey findings include:
- While the majority of Asia-Pacific banks still see control costs increasing – primarily due to embedding greater resilience and addressing digital transformation agendas – one in ten (10%) now believe they can manage down costs of controls over the next three years by using data and technology to improve risk management.
- Five of the top 10 emerging risks according to Asia-Pacific banks’ CROs relate to technology and data, including industry disruption due to new technologies (70%), the pace and breadth of change from digitization (60%), and model risk related to machine learning or AI (50%).
- Based on lessons learned from the COVID-19 pandemic, 80% of Asia-Pacific banks’ CROs expect to see the introduction of new or additional regulatory requirements on operational resilience, and 70% of CROs expect the same on financial resilience.
- Asia-Pacific banks’ CROs expect their banks to further accelerate their digital transformation, including automating processes (78%), modernizing core technology platforms (56%) and delivering enhanced insights to customers (56%).
For more information, please visit Resilient banking: Capturing opportunities and managing risks over the long term.
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About the Institute of International Finance (IIF)
The Institute of International Finance (IIF) is the global association of the financial industry, with more than 450 members from more than 70 countries. Its mission is to support the financial industry in the prudent management of risks; to develop sound industry practices; and to advocate for regulatory, financial and economic policies that are in the broad interests of its members and foster global financial stability and sustainable economic growth. IIF members include commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks. To learn more about IIF, please visit www.iif.com, follow IIF on Twitter, LinkedIn or YouTube, or check out IIF’s podcasts.
About the survey
EY, in conjunction with the IIF, surveyed IIF member firms and other top banks in each region globally (including a small number of material subsidiaries that are top-five banks in their home countries) from November 2020 through January 2021. Participating banks’ CROs or other senior risk executives were interviewed, completed a survey, or both.
In total, 88 IIF member firms across 33 countries participated. Regionally, those banks were headquartered in Asia-Pacific (18%), Europe (24%), Middle East and Africa (13%), Latin America (16%) and North America (29%). Of those, 19% are globally systemically important banks (SIFIs) and 61% have been designated as systemically important domestically. Data relates to the 62 banks that completed the quantitative survey, and the narrative includes insights gleaned from qualitative interviews with some of those and other banks.
EYG no. 005757-21Gbl