Risk trends involving financial institutions

While the world is more connected than ever, international alliances can also increase risk. The World Bank slashed its 2023 growth outlook to 1.7 percent from its earlier projection of 3 percent, citing that to tame inflation, tighter monetary policies from central banks around the world have contributed to a worsening of global financial conditions.

Facing the third-weakest pace of growth in nearly three decades, projections indicate that rising interest rates will lift short-term revenues but then lead to difficult conditions for banks and fund managers. Tightening capital markets will challenge startups and fin-techs needing cash as they seek profitability. Lastly, analysts anticipate higher costs, greater delinquencies, and declining revenues across most segments.

The banking sector will head into a potential downturn in a strong position. Over the past 10 years, the industry has built substantial capital reserves. On the other hand, mortgage originations plunged 13 percent in the third quarter of 2022, and applications hit a 25-year low as mortgage interest rates climbed to 6.94 percent.

Domestic hardship is accelerating, with total household debt now $2 trillion higher than at the end of 2019. A 13 percent rise in credit card balances since Q2 2021 represents the largest increase in more than 20 years. And with all types of consumer debt except student loans seeing a rise in overdue payment, Fitch Ratings projects the delinquency rate will increase at least 4 percent by year-end 2023.

Because of the sheer amount of information they store, financial institutions of all types are prime targets for ransomware attacks and data breaches. In ransomware crimes, hackers infiltrate a network and shut it down to extort payment. There has also been an increase in the number of security threats coming from insiders. In many instances, they are inadvertent, reflecting a lack of security training or oversight.

Federal Reserve Chairman Jerome Powell warned last year that cyberattacks are the number-one threat to the global financial system.

According to a 2021 IBM Cost of a Data Breach report, the average cost of a financial services data breach was $5.72 million. In recently released data, cybersecurity firm Flashpoint said that the financial services sector experienced the second-highest number of data breaches in 2022, behind only government.

At least 79 financial services companies reported data breaches affecting 1,000 or more consumers in 2022, and the largest breaches affect millions of consumers each. The public is taking notice. In fact, Cap Gemini’s Top Trends in Banking 2022 declared cybersecurity is becoming a competitive differentiator for banks.

In March 2022, the SEC announced proposed rule changes to standardize climate-related disclosures for investors. This new push to provide robust disclosures and data on climate-related risks can help inform investor decisions and allow businesses to forecast emerging challenges.

Meanwhile, climate change is intensifying natural disasters at the same time people are moving to more disaster-prone areas such as Florida, Texas, and Arizona. As of now, 10 million properties across the U.S. face major or extreme wildfire risk, while on the East Coast, new homes are being built two to three times faster than average in areas vulnerable to flooding.

Today’s customers follow their conscience, as 76 percent of consumers reported they would discontinue relationships with organizations that treated employees, communities, or the environment poorly.

Banks and other financial firms must be prepared to comply with new regulations, and make sure that all business partners honor their ESG commitment to avoid regulatory and reputational risks.

While insurance carriers are paying out larger sums, the increase in natural disasters impacts all financial institutions, as extreme weather events put real estate at risk and cause significant business interruptions.