On 20 July 2022, the Bank of England published a speech by Benjamin Nathanaël (Executive Director, Authorisations, Regulatory Technology, and International Supervision) entitled New tides.
The speech addresses how banks should act prepare for the risks posed by geographical and macro-economic changes, new technology and climate change, after operating under easy economic conditions for the last decade.
Mr Nathanaël addresses the following areas where banks should act:
- Financial resilience: Given recent events, investment managers, and investors will need to be alive to the financial market environment in which they run their business. They should challenge whether their assumptions have been complacent and consider what may happen if good volatility turns into bad volatility. With regards to banks’ risk concentrations, they should not only be assessed on a client by client basis, but across all clients combined. And most importantly across the client’s market-wide portfolio, not just the portion held with a single firm itself. Firms’ management and boards should ensure that in relation to credit assessments equal focus is placed on the liquidity profile of their clients as on their capital strength.
- Operational resilience: There is a growing tide of digitalisation in financial services, with greater prominence of digital players and assets, and it is altering the way people and businesses transact. Established banks must not let commercial pressure to adopt new technologies or enter digital asset markets get in the way of first ensuring that they can properly understand and manage the associated risks. The financial sector can also work together on the development of extreme and multi-dimensional systemic stress scenarios, and assessing the impact of shocks from one firm to another.
- Climate: Climate change is fast approaching and will change the environment banks and other firms operate in. Over time, climate change risks will become a persistent drag on firms’ profitability, perhaps in the region of 10-15% annually, particularly if they don’t manage them effectively. Furthermore, how and when the transition is made will have a big impact on the costs the financial sector will incur. These costs will be substantially lower if firms take early, orderly action