The Secret to Building Your Bank’s Risk Resiliency

Disruptions in the financial sector with some banks failing and subsequent contagion impacting others have caused banks to refocus on financial stability. Governments are reemphasizing protection and reassurance to consumers and financial markets. And companies looking to find growth are seeking new lines of credit. These rapid changes, however, have left everyone in banking wondering: what happens next?

When we look at these situations more closely, however, it’s clear that the problems didn’t happen overnight or hinge on a single threat. A variety of factors coalesced to create a perfect storm of continuous volatility, which underscores the need for banks to create a single view of risk to make informed decisions faster and build resiliency in the ever-changing financial landscape.

How we got here

Traditional challenges like rising interest rates, declining bond yields, increasing inflation, and increased borrowing have been ongoing. However, the impact of COVID and continuous political instability has caused banks to lose revenue. In addition, the pressure from shareholders and investors to grow profits back quickly in the wake of the pandemic, has hurt the financial sector.

What these cases exposed most clearly, however, were problems that were not really on the radar screen previously. Not having a strategy in place to mitigate risks across growing uncertainties was clearly at the root of the recent banking disruptions. More importantly, many of the institutions involved lacked the ability to see a complete picture of who they were doing business with, the large concentration risk, and the indirect, large exposures being taken on.

More recent influences revealed just how devastating (and quickly) impacts on banks can be when fueled by:

• Speed and reactions to changes in the marketplace, can cause several secondary contagion casualties.

• Real-time commentary showed “reassuring” messaging from firms’ C-suite urging customers not to make withdrawals had the opposite effect – a reaction that was also seen during the 2008 financial crisis.

• Digitization of banking and payments that now provides a path for investors to move large amounts in a single click without checks or limits.

• A new kind of herd mentality as a result of real-time activity happening on social media that leaves banks no time to react.

Every banking situation is different

The growth of the tech sector in recent years and the subsequent acceleration in investments being made by venture capitalists is a risk factor that banks will no doubt be monitoring more closely going forward to ensure the number of high-risk investments on any given institution’s balance sheets are minimized. 

Regulatory rollbacks are also something that will have to be watched closely. The Guardian points to the loosening of credit requirements under Dodd-Frank as one of the major contributors to the banking problems in early 2023. Regulators around the world are now re-enforcing more stringent stress tests to ensure certain minimum levels of capital are met.

To perform at their best, Chief Risk Officers must be armed with technology that provides a holistic view of risk based on data from across the organization that they can trust to enable better decision-making in what can, at times, be a volatile and rapidly-changing market:

• Micro risks: In the decade leading up to the problems in early 2023, some smaller banks “had benefited from more than a decade of ‘zero money’ interest rates as billions poured into the bank via tech venture capital,” according to The Guardian. 

• Macro risks: The demise of some of the larger international institutions in early 2023 was caused by far different factors. Some were plagued by scandals and lawsuits that weakened their brands over time. Large-scale withdrawals over extended time periods were another red flag that was missed in some cases. 

While hindsight allows us to see why some banks have failed, the sad news, particularly for investors who are now paying the price for these oversights, is that many of these threats could have been avoided had banks been able to see a holistic view of risk and pivot quickly.

Building resilience with Decision Intelligence

CROs have been managing risk for years, but in light of events in 2023, several new strategies, innovative technology adoptions, and next steps may prove helpful in easing fears and boosting resiliency by enabling bankers to make more informed decisions earlier in the threat-evaluation process.

1. Revisit your risk governance approach

Good governance starts by being absolutely clear about what your risk appetite really is:

• Is concentration risk assessment and stress analysis being conducted on a regular basis to ensure your portfolio is strong and adequately diversified?

• Are your ALCOs getting a full, holistic view of the companies and individuals they want to invest in?

• How might more automation and a systematic, predictive, forward-looking approach to data utilization help you make better decisions?

2. Know who your counterparties really are

Most banks lack the technology necessary to bring siloed datasets from disparate sources together to provide a holistic view of companies and individuals. This information is critical to understanding:

• “What is the ultimate counterparty I am dealing with?”

• “Are there supply chain risks or concentration risks that could generate losses that are not recoverable?”

• “Are all of the exposures aggregated?”

3. Assess group and reputational risks

Being able to look at the entire risk landscape and evaluate it objectively is critical.

• “Is there an ultimate beneficial owner or a complex group I may not be aware of?”

• “Are there reputational risks that may be inherent in things like negative news sentiment?”

A roadmap to resilience

Creating immediate and long-term resilience is something every CRO covets. Quantexa’s risk solutions enable  CROs to get there in a number of innovative ways. 

01. Create immediate resilience:

• Revisit and understand your supply chain and lending concentration risk.

• Enhance your portfolio and risk analytics using real-time predictive analytics to help manage second-order and counterparty risks.

• Monitor portfolios dynamically to determine whether the models reflect the early-warning risks being seen.

02. Create long-term resilience through digital modernization:

• Establish a Decision Intelligence strategy to boost your bank’s digital transformation.

• Modernize your data management strategy by utilizing Quantexa’s Decision Intelligence platform. Our solution:

  • Integrates quickly and easily with existing infrastructure (with no fixed data schema) —a key differentiator from every other product in the marketplace.

  • Provides true alignment for risk data aggregation to principles like BCBS239.

• Enhance and modernize existing early warnings to be proactive in your approach to credit portfolio risk management.

• Look beyond the borrower to see their relationships and concentrations. 

03. Use the latest in AI to gain actionable insights:

Aylien, which was recently acquired by Quantexa, is a leader in applying advanced AI to the world’s unstructured data to create a rich, real-time, and reliable stream of actionable insights for leading banking organizations around the world.

• Gain context from unstructured data to build unconditional context by unifying the structured and unstructured data world.

• Leverage advanced NLP (natural language processing) to help make informed decisions with enhanced news aggregation, search, and monitoring for company sentiment analysis.

Gaining a single view of risk across your organization

One of the keys to better governance is having a single view of risk. To achieve this, CROs need the right tools. This is where Decision Intelligence (DI) comes in. Decision Intelligence helps organizations create a “connected view” of their data to reveal the relationships between people, places, and organizations.

No one can predict which way the financial sector will turn next, but with the right Decision Intelligence strategy and solutions in place, banking organizations can now harness the power of their data to uncover hidden risks, discover new opportunities, and use data to solve real-world problems.