For the first time since the survey’s inception over a decade ago, climate change tops the list of long-term risks for 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.” The survey of 88 financial institutions across 33 countries provides a window into the changes in risk management seen globally during the past decade, and the major risks anticipated over the next 10 years.

“Both the executive and non-executive managements of banks take into account a wider spectrum of risks, including climate risks. More than 91% of respondents (risk management managers – CROs) believe that climate change is the main emerging risk in a five-year horizon, compared to only 50% in 2019. Even within a 12-month horizon, nearly 50% of respondents see climate change as one of the main risks immediately after credit risk and cybersecurity. In 2019 this percentage was only 17%,” said Gelu Gherghescu, Partner, Financial Services Leader, EY Romania.

The second most important emerging risk in the next five years respondents is the length and depth of the global economic recovery (83%).

The survey finds that banks in practice are still maturing in their ability to assess physical and transitional risk exposures. Over half (54%) have a preliminary understanding of their climate change risk exposure and only 28% have a somewhat complete understanding. The remaining 18% felt that they had not understood these risks, but they intend to evaluate them in the future.

In a time horizon of 12 months, banks believe credit risk will be the No. 1 concern over the next 12 months – according to 98% of CROs – amid the global economic recovery from the COVID-19 pandemic. Cybersecurity is perceived to be the second most urgent risk (80%).

Additional key survey findings include:

• Almost one in three (29%) of banks now believe they can manage down costs of controls over the next three years by using data and technology to improve risk management.
• Seven of the top 10 emerging risks according to CROs relate to technology and data, including the pace and breadth of change from digitization (68%), industry disruption due to new technologies (68%) and obsolescence/legacy systems (62%).
• Based on lessons learned from the COVID-19 pandemic, 93% of CROs expect to see the introduction of new or additional regulatory requirements on operational resilience, and 60% of CROs expect the same on financial resilience.
• CROs expect their banks to further accelerate their digital transformation, including by automating processes (88%), modernizing core technology platforms (66%) and delivering enhanced insights to customers (64%).