“We are living in very unprecedented times,” said Anton Lavrenko, head of North American financial institutions at Allianz Global Corporate & Specialty (AGCS). “We’re still coming out of the COVID-19 pandemic, interest rates are rising, there’s a lockdown in China due to COVID, there’s military unrest in Eastern Europe and a host of other geopolitical factors — and it’s all happening in our the same time. All of this is unprecedented.”
When faced with such a complex and changing risk landscape, Lavrenko said there are five main risks banks should focus on today:
Interest rate risk
On June 15, the Federal Reserve raised interest rates by 0.75 percentage points, the third increase this year aimed at countering the fastest pace of inflation the US has faced in more than 40 years. June’s increase was the largest since 1994. Meanwhile, the Bank of Canada raised its interest rate by 50 basis points on June 1, after a steady stream of hikes aimed at getting inflation back on target.
According to Lavrenko, the question banks are asking about interest rate risk is: Will the increase in net interest margin they expect to assume as a result of rising rates offset potentially lost revenue from things like mortgage origination, mortgage refinancing? trading revenue and M&A activity?
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“This will be an interesting test to see what happens to banks’ earnings and net income in this rising interest rate environment,” he commented. “No one has a crystal ball, so it’s a bit difficult to predict what will happen with interest rates. But I think for banks, the risk revolves around disclosure and talking to shareholders.
“Banks need to set expectations: “We expect our mortgage origination revenue to decline. We expect our income from refinancing activity to decrease, etc.’ I think now the banks need to talk to their shareholders very actively, especially from a D&O perspective, and explain what they expect in terms of profitability and what the balance sheet will look like as these rates continue to rise. It’s about consistent communication with shareholders.”
While interest rate risk is dominating the headlines, Lavrenko believes the biggest exposure facing banks today is cyber risk, whether that’s in the form of an external threat vector penetrating a bank’s security systems, or a fraudulent employee, or the inadvertent release of personally identifiable information. information. “I think banks still remain, to this day, the biggest target for cybercriminals because of all the financial data they have, and of course, the money,” he said. Insurance Business.
According to Lavrenko, cyber insurers are trying to “find the balance” between the increasing frequency and severity of cyber attacks against banks and financial institutions. He explained: “I’m not sure insurance companies have found that sweet balance where they’re willing to write cyber insurance for X premium, and they’re confident it’s going to compensate them enough to cover cyber claims . This is because the frequency and severity of attacks on banks seems to be continuing to increase.”
Executives and directors at banks generally have “a deep understanding” of cyber risk, Lavrenko said, thanks in part to increased regulatory pressure in recent years. The risk lies in whether or not banks are able to protect their institutions by ensuring adequate insurance margins and having adequate levels of cyber security controls and protections.
The third biggest area of concern for banks, according to Lavrenko, is geopolitical risk. He said: “A lot is happening these days in the geopolitical sector and banks need to keep up with technology to keep up with the ever-increasing requirements for things like Know Your Customer (KYC) and Anti-Money Laundering (AML). associated risks.
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“Every day, there’s something else that happens. The sanctions lists are growing day by day, and so banks are working hard to make sure they have adequate internal controls and adequate technology to make sure they are compliant with all these different laws, rules and regulations in terms of sanctions, KYC, AML and other geopolitical risks.”
A changing climate could affect default risk and potentially have an adverse effect on impairments and obligations under mortgage-backed securities (MBS). Banks originate mortgages, many of which are backed by government entities such as Fannie Mae and Freddie Mac in the US and Canada Housing Trust, while others go to private label MBS. A changing climate “could definitely have an impact on the volume” of MBS, Lavrenko noted.
People take risks
Attracting and retaining talent is challenging for every business in every sector. Since the start of the COVID-19 pandemic, North America has experienced a “Great Reshuffle” in the workforce, with people leaving their jobs in search of more meaningful employment, better compensation and benefits, and more flexible work arrangements. .
“Starting with COVID, banks have had to step it up when it comes to attracting and retaining talent to keep their employees happy,” Lavrenko said. “People have found that working from home is very convenient, very enjoyable, it’s safer, and many employees are finding themselves more productive. So banks are currently learning this new way to satisfy their employees and keep them happy and keep them employed.”