Navigating through uncertainty: European banks' non-financial risks

Navigating through uncertainty

A KPMG survey of how banks identify, measure, and control non-financial risks.

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Banks and regulators are turning their attention to non-financial risks, which can have a huge impact on a bank’s bottom line. Most attention is currently being given to IT and compliance risks whilst business and strategic risks are too often overlooked. In such a politically volatile environment European banks need to be braced for change and so strategic and businesses concerns should really be higher up the list of priorities.

Costs and charges arising from banks’ non-financial risks have increased sharply in recent years. In part this reflects the compensation and litigation costs relating to misconduct, but it has also been driven by the costs of IT failures and cyber-attacks. Recent and prospective regulatory requirements and supervisory actions not only impose additional compliance costs but also require banks to take a more strategic view of how they identify, measure and control their non-financial risks.

The survey

To better understand how banks are responding to these risks and to provide banks with an opportunity to share and compare their views with peers across the market, KPMG undertook a survey of 36 banks across Europe.

  • The survey results highlighted the importance of banks’ non-financial risks - nearly half of the respondents reported that such risks accounted for more than 10 percent of their banks’ total losses, and that operational risk represented more than 10 percent of risk weighted exposures.
  • Banks are seeing far greater supervisory scrutiny of how they manage risks around profitability, business models and risk culture and 80 percent expect it to become an even greater issue in the near future. As a result, more than half of banks are planning a comprehensive overhaul of their framework for assessing and measuring non-financial risks.

Key issues for banks

Our survey results highlight the importance of non-financial risks and the ways in which banks are identifying, measuring and controlling these risks.

  • Regulatory and supervisory pressures – Perhaps not surprisingly, regulatory and supervisory pressures stand out in the survey as key drivers of banks’ management of non-financial risks.
  • Enhancing frameworks for non-financial risks – Nearly all banks are planning to enhance their frameworks for non-financial risks, with many planning a comprehensive overhaul.
  • Limitations in frameworks for non-financial risks – Most banks’ frameworks for non-financial risks do not effectively cover strategic and business risks, which banks seem to find it difficult to identify, measure and control.

We hope you find this publication insightful. If you would like further information, please contact a member of the KPMG Banking practice.

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