A year dominated by geopolitical crises, regulatory challenges and AI
According to chief economists, there have been more economic and political events in each of the last five years than in any other decade. 2024 was no different. The year 2024 brought numerous challenges for risk managers, but also opportunities. The meetings of the FIRM Banking Risk Round Table (BRRT) provided a valuable platform to shed light on current risks, regulatory requirements and technological developments from different perspectives.
Focus on geopolitical conflicts
Geopolitical conflicts were at the center of the financial industry’s risk assessments: Israel-Hamas, Iran, Russia-Ukraine, China, North Korea and the re-election of Donald Trump. Geopolitical risks were rated as the biggest threats that could have a profound impact on credit, market, liquidity, sanctions and cyber risks. The geopolitical tensions made it clear that, in addition to immediate effects, second-order risks – such as structural economic changes or disruptions in supply chains – are more difficult to address in the long term. The members of the BRRT discussed how banks can adapt their risk management to these challenges, from defining scenarios to analyzing the types of risk involved. The discussions showed that while banks have experience in dealing with short-term shocks, the longer-term, indirect risks are often more difficult to quantify and manage. The expansion of stress test capacities was therefore recommended as a key measure to prepare for such scenarios.
Misinformation through AI and social media
Misinformation, e.g. through the use of artificial intelligence (AI) or social media, was identified as one of the potential emerging risks. The year 2023 had already shown how effectively and quickly targeted disinformation can influence the markets. FIRM has therefore prioritized the topic of fake news and reputational risks and further explored it in a working group with banks. A new research project entitled “Popular Corporate Narratives and Financial Vulnerabilities” is dedicated to analyzing these risks and, together with the research team from TU Dortmund University and the University of Duisburg-Essen, will investigate how media reporting and targeted narratives influence the reputation of banks and which quantitative and qualitative strategies can be developed to mitigate the risks.
Research project on ESG
The members of the BRRT also focused on the increasing ESG requirements of the supervisory authorities. In addition to intensive discussions on the ECB guideline for climate and environmental risks , the integration of climate risks into risk management and capital planning was discussed. In this context, a new research project was presented in cooperation with the University of Giessen and the Frankfurt School of Finance & Management with the aim of investigating the effects of climate change on the credit risk of banks and developing new, innovative approaches to quantifying climate-related risks.
Another focus in 2024 was the introduction of CRR III and the output floor. An external presentation illustrated the challenges of implementation and presented approaches for optimizing risk-weighted assets (RWA) and improving capital efficiency. Strategic portfolio adjustments, new methods for data quality and risk mitigation techniques were key points of discussion.
Use of AI in risk management
Another focus of the BRRT was the use of AI in the context of risk management. Various use cases for AI that can be used to increase efficiency, reduce risk and optimize processes were discussed. At the same time, the challenges of the AI Act were also explained, including new requirements for governance, transparency and fairness. The members of the BRRT agreed that AI remains a key driver of innovation and efficiency in the banking sector and that banks should use AI strategically to secure long-term competitive advantages.
The year 2024 once again underlined the close links between geopolitical developments, regulatory requirements and technological innovations. This showed that banks not only need to react in the short term in order to cope with dynamic developments, but also adapt their strategies for the long term. The discussions and research focuses of the BRRT provided concrete approaches for identifying, simulating and specifically managing the complex risks. The lesson from the last five years will therefore remain valid for 2025: Flexibility and forward-looking risk management are the key to being able to operate successfully in a world where every year holds the challenges of an entire decade.
