Believe it or not, it’s been 10 years since the global financial crisis ripped through the industry. And we have seen significant changes in regulation, business models and risk management approaches since then. But is the industry more resilient as a result?
One thing is for sure: the increased regulatory focus on capital and the resiliency of funding sources over the past decade has put the industry on a much stronger footing. Indeed, after a decade of regulatory scrutiny of business models, management oversight, capital resiliency and loss absorption capabilities, many of the risks that precipitated the financial crisis are now being better managed. Compensation models have been revised and many companies now have a much better understanding of the attendant risks.
At the same time, we have also seen a massive shift in the way financial services organisations view and manage their risk inventory. Rather than being relegated to the back seat in strategy sessions, we have seen risk management start to take a much more prominent role in setting the strategic direction and advising on day-to-day management activities. Most management teams are spending significantly more time thinking about their business models, their management practices and the intersection between business activities, risk management and compliance. And financial institutions are stronger as a result.
Yet, at the same time, the world has become much more complicated over the past 10 years. And that is creating new risks and accentuating old ones. In my conversations with financial services CEOs, I am frequently struck by a growing sense of concern and unease. CEOs are worried about the changing needs, wants, desires and dynamics of their customers. They are concerned about new technology risks and new competitors. They are worried about geopolitical events and their impact on current business models. And they are concerned about the potential for continued regulatory scrutiny and challenge.
Public trust in institutions – which took a beating during the financial crisis – has rebounded somewhat. But social norms and expectations have also changed and that has brought a number of financial services firms into the spotlight for business practices that (at one time) were considered the norm but may now be seen as predatory. While trust may be on the rise, customer loyalty and ‘stickiness’ is not, and that has only increased the risk of a misstep.
Not surprisingly, regulators are also becoming increasingly concerned about these risks and issues. Over the coming decade, we expect to see regulators continue to focus on some of the broad-based issues of the past – capital resiliency will continue to remain high on the agenda, particularly in Europe and Asia, as will loss absorption capabilities and capital allocation methodologies. Regulators will also be focused on ensuring product suitability; looking at how customers are being treated and mitigating some of the more recent business and investment practice issues.
But, at the same time, we also expect to see regulators shift their focus towards ensuring that financial institutions have the capabilities they need to identify and manage risks as they emerge. Regulators are increasingly looking at whether financial institutions have the right data and analytical capabilities to properly identify, measure and manage potential risks. And they are taking a closer look at whether decision-makers have the infrastructure – including the right systems, processes and talent – to help ensure a high degree of management attention on managing risks.
As this edition of Frontiers in Finance makes very clear, the financial services industry continues to face some very challenging risks. Throughout this edition, our subject matter experts have identified some of the bigger and more pernicious issues now emerging on the horizon for many financial services organisations. And they have offered their perspectives on how decision-makers and industry executives can start to address and respond to the evolving risk profile that most financial institutions are now grappling with.
When I talk with financial services decision-makers, I often focus on a series of broad issues – from assessing the resiliency and efficacy of the business model through to managing the disruption that is emerging from new technologies and new customer expectations. The key, in my opinion, is to understand the core characteristics that will likely drive the most successful financial services firms through the 21st-century (see below for a list of characteristics) and to start building an action plan that encourages these characteristics to manifest.
What is clear is that – while financial institutions and regulators have made great progress over the past decade – the risk profile has continued to change. Financial services organisations will need to be agile and analytical if they hope to successfully navigate the turbulent waters ahead. Those financial institutions that are able to move quickly – either as disruptors or as fast followers – will be better placed to navigate through these periods of change. Those that stick to their knitting and fight to retain the status quo will almost certainly run afoul of the new risk environment and changing business dynamic.
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