Credit the risk bogeyman says Deloitte survey

Risks related to climate change and social issues will increase the most in the next two years, according to the latest Deloitte Global Risk Management Survey ­– though cyber concerns remain top of the tree.

Significantly, however, one in five risk managers surveyed said credit risk, more than any other type of risk, would increase most in importance for their institutions over the next two years (only 3% said this in 2018).

Looking more broadly, environmental, social and governance (ESG) issues topped the list of risk managers’ concerns in the poll, followed by cybersecurity and credit matters.

More than half of the 57 firms surveyed were banks while the rest were insurers, asset managers and other financial-services providers.

Looking at the potential impact of regulatory and supervisory changes in the next two years, risk managers predicted cybersecurity rules are most concerning, with ESG coming in fourth.

A global financial crisis and further pandemics could emerge as macro trends affecting the industry in the next two years, risk managers also predicted in the survey.

Credit-quality deterioration followed those two trends closely.

“Sixty-two percent of respondents said that credit risk measurement will be an extremely or very high priority for their institutions over the next two years, with this being further iterated during the interviews,” Deloitte reported. “Respondents said that many areas of credit risk management will be extremely or very challenging…including collateral valuation (48%), commercial credit (48%), commercial real estate (43%), unsecured credit (43%), and leveraged lending (41%).”

“For financial firms, it’s harder to adapt to changes in the ESG environment because it’s not only about their own carbon footprint or other impact, they also have to look at their clients’ footprint, social impact,” said JH Caldwell, head of the financial services risk advisory group at Deloitte.

“Especially in the first half of last year, there was a lot of uncertainty about the economy, which still lingers somewhat,” said Caldwell. “And the pandemic has made people realise we might get other pandemics in the future.”