Emerging Risks for Banks in 2021

The pandemic has permeated all facets of the community and touched all our lives. COVID has upended the world and the banking sector is no exception. Many financial institutions are facing difficult times in these economic uncertain times with lingering aftereffects. While there are headways to be made, there are also headwinds ahead for banks. Enterprise risks management (ERM) needs to move rapidly to ensure a system of safe and sound risk management. This is the new world order where we are “redefining the art of the possible in a post-COVID-19 world.” [1] With banks continue to raise the bars and levels of competition, a few notable risks are emerging for 2021 that banks should take heed of for this year.  

Credit Risk
The markets are at an all-time high, yet the level of anxiety is climbing to match that of the broader indexes. As uncertainty surrounds the current economic conditions with unemployment and social benefits, banks continue to look for ways to meet the credit needs of their customers, and the markets are reacting accordingly. According to David Kelly, Chief Credit Risk at FirstBank Holding Company in Lakewood, Colorado, the biggest emerging credit risk is not just from a deterioration of the economy but how will we handle when deferrals that have been granted expire. [2]

Operational Risk
Online and mobile banking has become a new normal in many ways. The digital transformation is taken shape in front of our very own eyes and along the way, it is not one without risk. What underpins it all is the complex operation of banks. From managing frauds to information technology, all have to be in line with what banks are expecting to be successful. Not only there is a transformation in the front line, but the back and middle offices are taking shape as well. Banks must be cognizant of emerging risks that can loom beneath the surface in their operational function.

Compliance Risk
With new rules and regulations, banks have turned to compliance as the focal point. Compliance is and has always been the risk backbone of the banking world but now it is ever more involved than before to ensure banks are operating within the confine of the playbook in a fiercely competitive playing field. With more personnel and FTE dedicated to compliance, the calls have been to focus on how to keep banks in compliance. Within the bank’s operations, there must be compliance top-of-mind to ensure a critical understanding of how risks lurk upstream to downstream. With the new administration in place, there will be changes and changes that banks will have to pivot and adapt quickly.

Ultimately, these are some but not all of the risks banks are facing. Banks must practice safe and sound enterprise risk management to mitigate risks and potential hazards they encounter. Risks emerge from every corner of the banking world, and banks must be diligent in exercising the steps necessary to reduce risk exposure. Build out your risk management practices to ensure a system that will satisfy regulatory expectations. A strong risk culture should be first and foremost. Banking has gone virtually digital in a short time. What was once thought by many was impossible is possible to transform the current state of banking.

[1]  Deloitte, Shilling, Celner, 2020, “2021 Banking and Capital Markets Outlook”
[2]  ABA, Knudson, 2021, “Top Bank Risks for 2021”