Since Russia’s invasion of Ukraine, much has happened in the global financial services sector — and events are unfolding at a rapid pace. While financial institutions are familiar with uncertainty and risks, many around the world have had to reconsider their strategies. There’s a need to reevaluate the approach, practices and potential scenarios to withstand uncertainty and mitigate risk — while navigating an ever-evolving series of sanctions and restrictions.
Every crisis has its own unique challenges, so it’s important that those in the financial services sector consider their direct and indirect exposures to the impacts arising from the conflict and to identify what aspects are potentially material and require further evaluation. While most financial institutions have been responsive to the recent impacts of the conflict in Ukraine, there are common themes — such as financial sanctions, cyber threats, and inflationary pressure — to consider over the medium and long term.
One of the most immediate impacts for financial institutions is the need to comply with new, quickly applied and wide-ranging sanctions. As a response to the Russian invasion of Ukraine, many governments have responded with a series of financial sanctions, including freezing assets and banning Russian banks from Society for Worldwide Interbank Financial Telecommunication (SWIFT), a messaging service used to facilitate cross-border payments.
- Institutions should assess how well they understand any Russia-related connections that exist across their operations and clients. This crisis has led to much greater and robust compliance requirements for banks to implement and be compliant with the sanctions.
- Historically, banks have put a great effort into monitoring potentially risky transactions, so they’re particularly adept at managing evolving sanctions (considering those in place on jurisdictions like Iran and North Korea). But this set of sanctions offers a unique set of challenges and monitoring needs, including the requirement to quickly implement them.
- It’s important for financial institutions to continue to keep an eye on funds flows. Even though Russian entities have been shut off from SWIFT, there’s still due diligence needed with each transfer’s correspondent banks and beneficiaries.
- A number of investors may exit their Russian positions, and this may require write-downs on net asset values until exit routes become clear (and made more challenging by the lack of liquidity in many cases). For real estate investors, it’s important to assess the impact on portfolios.
- Cryptocurrencies could be leveraged to bypass restrictions, which calls for additional vigilance and potential regulatory action.
Heightened cyber threats
The potential worsening of global tensions may trigger retaliatory cyber-attacks on institutions around globe, and its spillover effect is likely to be witnessed on the global financial system as well. For more detail on actions organizations can take to protect themselves, explore our key Russian-Ukraine cybersecurity considerations.
- Financial institutions will need to remain hyper-vigilant in their surveillance and threat preparedness.
- An increase in cyber threats against financial services companies could be pretty significant, and could affect payment flows, bond trading, the ability to extract financial information and fraudulently obtained funds. For example, the New York Department of Financial Services has already alerted financial institutions of potential retaliatory cyber attacks.
- Financial executives are expressing concern over cyber attacks on the SWIFT payment messaging system.
- When it comes to insurance companies, a potential increase in cyber attacks may result in an increase in cyber claims.
- COVID-19 helped prepare financial services organizations, as many improved their cyber risk security strategies in the last couple of years. Since a significant number of employees moved to remote working, they integrated more robust cyber security processes that weren’t as widespread prior to the pandemic.
The sanctions against Russia have created a new supply chain shock that’s pushing prices up, especially for commodities like wheat, crude oil and gas. This is likely to extend the period of inflation above targets.
- Stricter monetary policies may be required, as banks face a dilemma on how high to increase interest rates to curb inflation.
- For banks, rising rates can have a positive impact, as they help drive revenue from the net interest margin and, similarly, have a positive impact on insurance companies fixed income investment portfolios. Conversely, investments by Private Equity firms in portfolio companies augmented by debt will incur higher borrowing costs.
- Banks need to help support customers impacted by a rise in interest rates to mitigate the risk of defaults as a result of higher credit costs.
When it comes to assessing total exposure in traditional lending businesses — including real estate, leasing and asset management — large financial institutions are fairly sophisticated and able to respond to emerging risks relatively quickly. However, there may be a more urgent call to action for mid-sized financial institutions to assess their country exposures given their less robust systems.
At the beginning of the conflict when sanctions and restrictions were put in place, even the largest banks struggled with some of the ambiguity and the sheer number of companies that needed to be monitored. It’s important to have a firm grasp on what restrictions are in place and who they apply to.
It’s time for an elevated cyber defense. Consider what more can be done to make your financial institution more vigilant.