7 risks that keep CROs up at night

The results of our annual CRO survey

Which risks are the riskiest of them all? We asked CROs what keeps them up at night, and the results are in!

The job of the Chief Risk Officer is unique, and thus uniquely challenging. Not only do CROs need to be proactive in identifying new risks, but the role requires CROs to be credible business partners with considerable influence over the board and C-suites while also embodying a walking lexicon of all risks.“Leading the risk function in a business with a significant year on year growth trajectory and rapidly expanding geographic business model and product diversity is very exciting”, a CRO told us. “But it brings the continuous challenge of identifying, evaluating and mitigating or accepting material, and often new risks.”So when we asked CROs what keeps them up at night, naturally, they had a hard time picking just one. However, key issues have emerged, and here’s what CROs had to say about them.

Cyber riskMore than half of the CROs we spoke to are concerned about cyber risk – “high probability, high impact risk that remains difficult to manage”.

Large parts of banks’ IT systems are legacy old or provided by third party providers, which increases their vulnerability to cyber risk. Recent events on high profile data breaches, ransom demands, DDoS attacks and other hacks threatened some banks’ operations, customer and bank details, and questioned the banking industry’s readiness to cope with the new digital agenda. Cyber risk can result in significant costs or reputational losses for banks and can even have systemic consequences.

Find out more about cyber risks >>

Geopolitical risk“Economies are very interconnected”, a CRO reminded us, which is why so many Chief Risk Officers are worried about the changing landscape.

We cannot assume the same underlying processes as we always have. While there may be opportunities, currently there is great uncertainty about what new paradigm or equilibrium will be established – if at all –, and when. In the intervening period of disruption and disequilibrium, things are very unstable.

“This influences all other forms of risk in the end, and we have seen that states are more and more inclined to implement policies that may help (part of) their industry but may not play out well for other countries. Think of regulatory race to the bottom, unsustainably low interest rates, or supportive policies that distort competition. All this helps to raise the geopolitical risk. Any disruption to the existing multilateral framework will not go without friction, but we see that this order is challenged on multiple fronts. Enough reason for concern.”The rise of populism signals clearly that “people’s aspirations have altered fundamentally”, and socioeconomic risk in certain markets is a big challenge for CROs.Emerging risk: climate changeThe World Economic Forum’s 14th Edition of The Global Risks Report 2019 puts 5 different types of environmental risks into its top 10 list in terms of likelihood and in terms of impact, so it’s no wonder why climate risk, “the least understood risk”, is so high on CRO’s agenda.

The risks of climate change have the potential to truly alter the world and therefore pose a significant risk to all businesses. The risks from our direct impact on the environment as a business are more easily managed as they are more visible and easier to measure. The risks associated with a collective response, or lack of response, are far more concerning.

Find out more about ESG data and responsible investing

Operational riskAs the environment in which we work in is becoming destabilised, operational risk is rising.

A multitude of factors here are converging: digital adoption is well underway, changing key processes and customer journeys, and the marriage of new systems to legacy ones. Meanwhile we are using more 3rd parties than ever before, which increases IT resilience, data and conduct risks. Lower rates for longer means the cost reduction agenda is stronger than ever, which adds to the risk that the control environment is weakened.

Relating to operational risk, some CROs are also concerned about strategic risks: the sustainability of the current business model, and the safe and successful adoption of new technologies.Credit riskAlthough not at the forefront of CROs’ concern, credit risk remains challenging “given deteriorating local and global economic conditions”.

As a CRO of corporate business I don’t stop thinking about credit risk day or night. Tough competition in the corporate lending market and declining margins lead to the desire and willingness of our business team to work with riskier clients and projects. For the risk management team, maintaining business within the limits of the bank’s risk appetite becomes a more and more difficult task every day.

Business and market riskLike credit risk, business risk is also amplified by the geopolitical tensions. The show must go on though, and the focus on profitability has not changed."We are currently seeing the widespread mispricing of assets and misallocation of resources across global financial markets as a result of persistent negative interest rates. Those are a result of monetary policy running out of steam as an economic stimulant. The various non-standard measures by central banks (e.g. quantitative easing) have mostly limited the damage rather than stimulated growth. The economic malaise that afflicted Japan for decades now seems to be developing across many other advanced economies.
These effects, coupled with highly skewed distributions of wealth, are causing some commentators and politicians to question the fundamental stability of the capitalist model itself, and ideas like “Modern Monetary Theory” seem to be gaining political traction."The European Central Bank’s move (further) into negative rates also hinder the cause, while operations are becoming more expensive.

Large amounts of dry powder in the private equity (PE) market create a competitive environment, resulting in high prices, characterised by elevated multiples, applied to EBITDA with significant adjustments. Although there appears to be sufficient equity cushion in deal structures, said cushion may not be there should valuation metrics (EBITDA adjustments and/ or multiple) be reduced to historical levels. Furthermore, to generate expected equity returns, investors paying an elevated price need to utilise high levels of leverage. As such, the leveraged loan market has increased significantly in recent years and is another driving force of the competitive environment.

Technology riskThe pressure to digitise is very real, and while banks and financial institutions are adapting, they tend to do so “without necessarily understanding the new risk paradigms”.

The lack of investment will likely be punished severely in the future, as the speed of service delivery or cost inefficiencies lead to continued pressure on market share and revenues.

This gets even more complicated when we throw in fintech companies into the mix.

Right now, what keeps me awake at night is the constant stream of start-ups who claim that they have “solved” the problem of assessing credit risk with data. With technology and a “secret sauce” they can now lend further down the risk curve without worries of bad outcomes for customers or financial losses for lenders. The benign economy over the past decade and the potential changes to that position is looming on the horizon, and even the most short-sighted seem to overlook that.

There’s even more competition from the big tech companies, in particular Facebook which is entering the world of finance with Libra.

This is only a snapshot of what even goes on in CROs minds at one point in time, but truly understanding the connections between these risks is the key challenge that CROs face on a daily basis.