Managing risks in financial services: 2022 edition
With a mix of adaptability, the use of technology and, in the case of banks, balance sheets that had been significantly strengthened in the wake of the financial crisis, financial services organisations were generally able to weather the first pandemonium of the epidemic quite successfully. The current difficulty facing financial services companies is deciding what they want to maintain from the adjustments they made in response to the pandemic.
Although the risks that financial services companies face are institution-specific, a few high-level dangers are common to all businesses, regardless of location or industry.
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These are the top financial risks facing organisations that work with credit in 2022.
Credit Risk
First is the credit risk. Moreover, two years have passed since the pandemic first appeared, and more than five months have passed since Russia invaded Ukraine. As a result, the asset quality in the most fragile economic sectors is beginning to decline.
The potential for a short- to medium-term worsening of the credit risk picture for banks only serves to emphasise the importance of our supervisory goals for the upcoming two years. It is crucial that banks have strong provisioning and risk management procedures in place, especially in the area of credit risk. Credit risk analysis is absolutely essential for the survival of any financial institution or lender. Credit analysis is important for the success of many financial decisions and investments in the form of credit.
Data Management
A strong approach to data governance is becoming more and more necessary. Firms must first accept that data is a crucial strategic asset before developing a company-wide strategy for data collection, management, storage, security, retrieval and disposal. Create a business-specific approach to data governance, in other words.
Successful data governance will offer a number of advantages, including improved record-keeping, increased line of sight to risks being run in a hybrid working environment and the capacity to adhere to the recently agreed-upon reporting standards for climate risks.
Operational Toughness
The epidemic is nothing if not a test of the financial services industry's operational resiliency. Businesses should, at the very least, think about operational risk management, which identifies ongoing threats both internal and external, as well as potential breakdowns in people, processes and technology.
Additionally, businesses must swiftly determine the critical operations' weaknesses and manage the ensuing risks in line with the operational resilience strategy. They must also take governance, mapping of connections and dependencies, third-party dependencies, incident management and IT into account (including cyber-issues).
Compensation
This issue was immediately the first thing that the Financial Stability Board (FSB) preached after the financial emergency, enforcing supranational remuneration standards that aimed to promote better risk-conscious behaviours. This shows how important compensation, remuneration and good bonus design are perceived to be. Naturally, it was in September 2009, and the FSB is currently reviewing the overall implementation and practical impact.
The seventh progress report from the FSB examines the methods used by the biggest financial institutions in the banking, insurance and asset management industries. It highlights the uneven development of the principles and standards implementation, with banks appearing to have made more progress than insurance and asset management companies.
Conclusion
The markets are quite volatile and unreliable, especially in modern times where small trends can cause enormous ripples. A large number of threats are always developing in front of businesses. There are also dormant threats that aren't now on our radar, and it is always essential to prematurely identify them.
A possible economic recession would have a negative impact on banks' profits by increasing the cost of borrowing money and deteriorating asset quality. All of these elements may have an impact on financial stability and significantly lessen the likelihood that banks would survive the pandemic stronger.
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