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.
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.
Asia-Pacific banks’ climate change challenge
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 APAC, 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 APAC banks’ CROs are placing on climate change risk, compared to the global average, reflects the urgency that regulators across the APAC region have placed on climate risk management, and focus by investors and shareholders on disclosures.”
How are APAC banks assessing climate risk?
The survey finds that APAC banks are still maturing their ability to assess physical and transitional risk and that sourcing and managing climate risk-related data is a challenge.
While 80% of surveyed APAC banks’ CROs report having a preliminary understanding of their climate change risk exposure, just 20% say they have a somewhat complete understanding.
Aside from climate change in the top position, resilience factors which have been amplified by the COVID-19 pandemic are leading the risk agenda for APAC banks’ CROs.
Cybersecurity is perceived as the second most urgent risk by CROs 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 cyber security following at 80%.
“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 year. The COVID-19 crisis also proved to be an unprecedented and unexpected test of banks’ risk management.”
“The banking sector found that its decade-long effort to build greater and higher quality capital and liquidity 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
The majority of APAC banks still see control costs increase due to embedding greater resilience and addressing digital transformation agendas. 10% believe they can manage down costs of controls over 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 / 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%).