Geopolitical Risk a Wildcard as CROs Focus on Regulation, Technology Risk, and Other Key Concerns

Understandably, risk managers will be hyperfocused this year on the potential for policy and economic change inherent in the Presidential and Congressional elections. As critical as those elections are to the direction of the economy and the nation itself, the U.S. is just one of 70 countries where leadership is on the line in 2024.  

With political change possible in so many places, geopolitical risks abound for financial institutions. That adds uncertainty to an already daunting risk landscape impacted by the fallout of last year’s regional bank crisis, rising cyber and credit risk, and AI. CROs discussed these and other concerns at a recent RMA New York Chapter panel discussion.  

Geopolitical Risk 

Jonathan Hummel, CRO for the Americas at Deutsche Bank, agreed that the geopolitical uncertainty posed by worldwide elections—which affect 49% of the world’s population—was substantial. Voters have the power to turn several countries more nationalistic and protectionist. “That could well affect the global economy,” he said.  

He also noted the continuing wars in Ukraine and the Middle East, and tensions over Taiwan where, speaking of elections, a champion of Taiwanese independence won the presidency in January. All of which could have greater ramifications for markets depending how events unfold. Hummel highlighted the importance of using stress tests to assess the effects global events could have on the economy and a firm’s portfolio.  

Massimo Cutuli, CRO at Optiver U.S., posed the example of anticipating an event that causes a collapse in oil prices. “It’s not about predicting,” he said. “It’s about being prepared for possibilities and having a plan to respond. 

“If my CEO asks why I didn’t take a certain position,” he continued, “I will need a good explanation. 

“No one knew COVID would happen. We can’t predict to the T. But we can explore combinations of events. Our stress tests explore different scenarios.” 

Cutuli said risk managers can “assign a likelihood something could happen” and “explore the corners.”  

“Challenge assumptions,” he said. “We do a lot of soul searching in our weekly risk committee meetings. We ask, ‘Is there any signal we should be paying attention to that we are not?’”  

Cyber Risk 

Brian Gunn, CRO for the Americas at MUFG, spoke about stress testing for the impacts of a cyberattack. “It’s difficult to model out financially what could happen” in such an event, he said, but it could be massive. Depending on what is compromised, “confidence could be lost” in an institution, he said. 

Gunn also said that, while ideally a bank’s appetite for cyber risk is minimal, the nature of doing business today means there is cyber exposure, and banks do make risk-prioritization decisions in the technology space. 

Hummel said banks can “use scenarios to look at what potential losses look like and what you can do about it. We ask every business in our organization, ‘What does a bad day look like for you? Have you tested the backup plan?’” 

Often, Cutuli said, a successful cybersecurity program “comes down to the accountability of employees.” Have they been adequately trained and tested in cybersecurity? Someone who can pass one test might get tripped up by another, he said. If an email exploit or test is designed to get a click by offering a free newspaper subscription, he said, employees might summon the self-control to move on. “But Taylor Swift tickets?” he said. “People might click.”  

That’s why “controls only go so far,” Cutuli said. A strong risk culture is key. At the firms where he has worked, he said, it has always been the case that “culture comes from the top. You can easily tell the level of priority the risk culture has. If it’s embedded in the fabric of the front line and second and third lines, management has made it a priority. It comes with the DNA of the firm. 

“Firms that don’t have it tend to struggle.” 

The panel also discussed an emerging technology-related risk that could rapidly rise to a top concern: AI.  

Artificial Intelligence 

Hummel said banks may think that if they don’t make progress on incorporating AI quickly, they “will be left behind other banks.” That’s an understandable fear, he said, but “we have to make sure we have the right governance in place to properly identify and manage the risks associated with this technology.”  

“Senior executives are concerned about the threats presented by AI,” he said. And so is society as a whole, with worries ranging from massive job displacement all the way up to “threat of extinction,” Hummel said, adding: “It’s important for regulation to catch up to the technology before there is a significant accident.”  

One potential benefit of AI could be the ability of risk managers to leverage its powers to help them do their jobs at a time when the risk universe and their responsibilities are expanding faster than risk team budgets and capabilities. RMA and Oliver Wyman’s 2024 CRO Outlook Survey found that just over half of CROs expect their bank’s risk spending to increase over the next three years, while others expected budgets to remain constant or even decrease. 

Regulation  

Panelists noted the higher capital requirements and other changes in store in the wake of the liquidity and regional bank crisis in 2023.  

Gunn said higher capital requirements will “affect us all differently” but on balance they could “make it more difficult to compete in the international space. Returns will be lower.” 

They could also “push business to nonbanks,” he said, as banks would have less money on hand to lend—and at rates made higher by the costs of raising capital. “Private credit is growing fast,” Gunn said, and private lenders “are taking down whole deals and not syndicating.” With such competition, “credit terms could become looser,” Gunn said.  And while some banks will choose not to match those freer terms, “there could be a race to the bottom.”   

Meanwhile, the panel noted the continuing impact of higher for longer interest rates on banks. Despite an expectation of moderate interest rate cuts this year, there are concerns that margin pressures could continue as the pressure to shore up deposits with competitive rates continues.  

As for consumers, even with inflation moderating, they are still facing a significantly higher cost of living than prior to the pandemic. With COVID stimulus being spent down and auto and credit card delinquencies rising, credit risk is coming more into focus. “There are a lot of potential economic headwinds that could impact the consumer,” Hummel said.  

Going forward, with issues like these making risk management ever more complex and demanding, the panel said the industry needs to continue developing talent that is up to the challenge.  

Technical skills are certainly beneficial, Cutuli said, “but a lot of students are technically skilled. We are looking for the soft skills too. Can you apply common sense? Can you communicate? You can get by a few years with math skills alone,” he said, “but you won’t be able to progress” without soft skills. “I wish more training programs had a communications element,” he said.