COVID-19 was the most unprecedented and unexpected test of banks’ risk management. The global health crisis quickly evolved into an economic one, testing the financial and operational resilience of banks around the world to the core and shifting risk priorities. In Asia-Pacific, the 11th annual EY/IIF global bank risk management survey finds regional banks with a different focus than their global peers, especially when it comes to climate change risk and credit risk.
Around the world, most banks went into the crisis in good financial health, with capital and liquidity positions strengthened substantially with measures well taken after the previous global financial crisis. But, in many countries, the sheer scale, depth and prolonged nature of the recent economic shock have put the spotlight back on credit concerns. In fact, 98% of bank chief risk officers (CROs) globally named credit risk as the biggest issue on their mind in next 12 months.
In Asia-Pacific, we found a slightly different story. Only 67% of local CROs and 56% of boards put credit risk at the top of their risk issues. And a healthy 64% of the region’s banks also said their average expected returns on equity over the next three years would be in the 11% to 15% bracket.
These findings likely reflect the region’s improving economic fundamentals, which will support lending confidence and reduce credit costs. They may also be partly bolstered by expectations of sovereign support for state-owned and systemically important banks in some countries.
Climate change risk management
But the biggest differentiator was Asia-Pacific’s focus on climate change risk. Across the region, the idea that climate change is a problem belonging solely to high-carbon-emitting sectors is no longer true. A staggering 100% of Asia-Pacific CROs recognize it as a top risk requiring their utmost attention – compared with 49% globally.