In the ever-evolving landscape of finance, multiple disruptive forces are at play. Higher interest rates, assertive regulations, climate change, geopolitical tensions, and new technology are key drivers behind this transformation. Understanding and effectively managing risks have become paramount for the success and sustainability of banks. The latest survey results shed light on the pressing risk priorities for the upcoming 12 months, underlining the crucial significance of comprehensive risk management strategies. Market risk has emerged as the dominant concern, indicating the profound influence of market fluctuations on businesses. Credit risk closely follows, emphasising the delicate balance required for financial stability.
Moreover, the survey delves into emerging risks over the next five years, revealing a multifaceted array of challenges, including technological disruptions and data-related concerns. As banks gear up to confront these challenges, the integration of advanced technologies like AI, machine learning and data science is gaining widespread support, promising improved risk management capabilities and more accurate predictions.
This survey was conducted at Risk Australia and Asia Risk Congress in Singapore, hosted by Risk.net. Over 500 delegates from across the two events were invited to take part in the survey.
What is your top risk priority for the next 12 months?
The survey results reveal important insights into the risk priorities of respondents for the upcoming 12 months. Notably, market risk emerges as the dominant concern (44%). This result underscores the significant impact of market fluctuations and uncertainties on businesses, especially in a world influenced by constant change and economic volatility. Credit risk follows as the second-highest priority at 16%, highlighting the significance of financial stability and the need to manage credit and counterparty risk carefully to maximise business opportunities.
Liquidity risk and regulatory compliance risk share the third spot at 12%. This indicates a balanced concern for maintaining sufficient liquidity and adhering to complex regulatory frameworks in an evolving global landscape.
Model risk and ESG/climate change each represent 8% of respondents’ top risk priorities. Model risk underscores the importance of robust and reliable financial models, while the attention to ESG/climate change highlights the growing significance of environmental, social, and governance factors in decision-making.
These findings emphasise the need for comprehensive risk management strategies that address these diverse challenges. Having access to high quality data and risk models is crucial so that banks can identify, measure, monitor, and control risk exposures. Quantifi supports a full complement of risk measures.
What do you consider to be the most important emerging risk over the next 5 years?
These findings demonstrate a mix of technology, geopolitical, data-related, and environmental risks as the most important emerging challenges over the next five years. Banks will need to prepare and implement robust strategies to navigate these complex risks successfully.
The disruption from new technologies (48%) is considered the most critical emerging risk. Technology is a major enabler of more efficient, more effective, and therefore less risky operations in the financial sector. Nevertheless, this reliance on technology comes with associated risks – reputational, legal, and financial. Banks that fail to adequately address these technological risks may face significant liability, given the stricter legal and regulatory requirements surrounding technology risk management.
Geopolitical risk is the second-highest concern at 20%. As the world experiences shifting political dynamics and international tensions, banks are right to be wary of how these geopolitical factors may impact their operations, supply chains, and global strategies.
Legacy systems and the availability of data share the third spot at 12%. The recognition of legacy systems as an emerging risk highlights the challenges associated with outdated technology infrastructures, which can hinder innovation and agility. Quantifi is seeing an increasing number of firms replace their legacy systems with its new solutions that leverage transformative technologies to provide integrated, flexible and tailored solutions adapted to their needs. The increasing availability of data provides banks with the opportunity to monitor trends and assess risk exposures. With the help of data science and advanced analytics, as provided by Quantifi, banks can use data to enhance decision-making, increase efficiency, and ultimately drive growth. However, the same data opportunity also presents a threat, particularly in light of data breaches, cyberattacks and privacy regulations.
Scale of change across the firm and climate risk represent 4% of respondents’ considerations, but they should not be overlooked. The former reflects the difficulty of managing and adapting to sweeping organisational changes, while the latter acknowledges the mounting significance of climate change as a business risk.
Should financial services firms use advanced technologies (e.g., AI, ML) to enhance their risk management capabilities?
The survey results clearly indicate a resounding endorsement of advanced technologies, such as data science, generative AI and machine learning. Of those surveyed, 84% are in favour of leveraging these technologies in some capacity, with 52% strongly advocating for extensive utilisation and an additional 32% supporting their use to some extent. This overwhelming support underscores the recognition of the transformative potential of the likes of AI, ML and data science in identifying, assessing, and mitigating risks. These technologies offer the promise of more accurate risk predictions, faster response times, and the ability to handle vast datasets that traditional methods struggle to manage.
Quantifi’s data science capabilities provide clients with the ability to do complex data analysis and flexible reporting using Python, Jupyter Notebooks and other popular data science tools. Integrated with Quantifi’s proven portfolio management solution, users benefit from complex client-driven analysis, strategy back-testing and ad hoc portfolio what-if analysis – all using mixed data sets from diverse sources.
A smaller percentage (16%) remains cautious about advanced technology. This response acknowledges that while advanced technologies offer substantial benefits, their applicability should be carefully considered in the context of the unique risk landscape faced by each firm.
Interestingly, no respondents believe that traditional methods alone suffice, nor do they express concerns that technology might introduce more risk. This support for advanced technologies emphasises their growing importance in the financial sector’s ongoing quest for more effective and robust trading and risk management practices.
What is your greatest concern about your firm’s internal technology expertise?
The survey results reveal significant concerns regarding banks’ internal technology expertise. Addressing these concerns is crucial for banks seeking to thrive in an increasingly technology-driven business environment. Adaptability to new risks emerges as the leading concern, with 36% of respondents expressing apprehension. This concern reflects the rapidly evolving landscape of technological risks, which require continuous learning and adaptation to effectively mitigate.
Cost and ROI follows closely at 28%, signifying concerns about the financial implications of maintaining a skilled technology workforce. The balance between investing in expertise and realising a return on investment is clearly a challenge for many banks.
Reliance on outdated technology, integration and interoperability’, and ‘reliability and downtime’ all share the third spot at 12%. These concerns suggest a broader set of issues. Reliance on outdated technology highlights the potential limitations of legacy systems, while integration and interoperability difficulties may hinder a firm’s ability to harness the full potential of its technological infrastructure. Concerns about reliability and downtime are indicative of the need for uninterrupted technology services, crucial for business continuity.
Firms are increasingly turning to trusted fintech providers, such as Quantifi, to spearhead technology innovation due to their demonstrated agility, flexibility, iterative approach, and freedom from outdated technologies. These providers present a cost-effective (in comparison to in-house development), low-risk, and expeditious pathway to innovation.
The decision to outsource, however, should not be taken lightly and requires an appropriate level of evaluation to ascertain whether an external solution is more suitable than an internally developed one. All firms should carefully evaluate the resource and time commitments before choosing to build or buy a system. If an external solution is the best choice, selecting the right provider with a strong track record is essential. Finding a provider, who can act as a partner and offer a sophisticated, robust and scalable solution that remains relevant, will ultimately allow firms to focus on the core of their business.
Which of the following technologies does your firm use to generate efficiencies?
For this multiple choice question, the survey results reveal a comprehensive picture of the technologies being leveraged by banks to drive efficiency in their operations. Notably, ‘application programming interfaces (APIs) emerge as the most widely used technology, with 64% of respondents incorporating them into their operations. APIs enable seamless data exchange between systems, streamlining processes and enhancing connectivity, making them a popular choice. Quantifi’s open APIs allow clients to customise workflows to their unique requirements. With these open APIs, clients can effortlessly integrate the Quantifi platform with their existing systems, streamlining operations and creating a cohesive and efficient ecosystem.
Artificial intelligence/machine learning (AI/ML) and big data analytics tie for the second spot at 52%. These technologies empower banks with data-driven insights and automation, enabling them to make more informed decisions, optimise processes, and unlock valuable business opportunities. Robotic process automation (RPA) follows at 36%. RPA’s automation capabilities are being embraced to streamline repetitive tasks, reduce human error, and improve process efficiency.
Cloud technology is used by 32% of respondents, providing flexible and scalable solutions for data storage, application deployment, and collaboration. Finally, natural language processing (NLP) is the least adopted, at 12%. Although less prevalent, NLP holds promise in applications such as chatbots, sentiment analysis, and document processing.
Banks are actively embracing a range of technologies to enhance efficiency. This highlights the increasing importance of technological innovation in the quest for operational excellence and competitive advantage within the business landscape.
As the business landscape continues to evolve at an unprecedented pace, the integration of robust risk management strategies and cutting-edge technologies will undoubtedly remain pivotal for banks striving to navigate complexities and achieve sustainable growth. The amalgamation of technology, geopolitical shifts, data concerns, and environmental hazards present complex challenges, demanding proactive preparedness. Leveraging advanced technologies appears crucial for effective risk management but concerns about internal technological expertise persist. While firms are increasingly turning to external solutions, careful evaluation remains pivotal. Embracing a diverse set of technologies, including APIs, AI/ML, and big data analytics, underscores the industry’s commitment to operational efficiency and innovation.