Regulations to climate risk: Managing challenges in a complex banking world

Banks must move beyond being transaction platforms to act as facilitators guiding customers

A dynamic financial services landscape leads banks to transition from traditional transaction-focused models to a more customer-centric approaches. The changes are prompting banks to align their strategies and operating models to drive sustainable growth and profitability.

Real-time data exchange within banks strengthens risk selection and operational efficiency, while consolidating diverse financial services on a user-friendly platform ensures personalised customer experience. Scalability and reliability are crucial for robust data management. Banks must take a proactive stance to ensure the lawful processing of personal data, adopt more sophisticated approaches for risk-weighted assets’ calculations, and meet new requirements on capital floors. Embracing digital solutions, upgrading systems, maintaining a strategic focus on reducing emissions, and realigning financial statements help banks become competitive amid evolving regulatory changes and customer expectations.

In addition to quickly adapting to new regulations, digitisation facilitates communication with regulatory bodies, contributing to a transparent and responsive compliance framework. As banks work with third parties, fintech, and marketplaces, the digital realm expands, introducing new risks. Cybersecurity, data privacy, and compliance with evolving regulations become focal points.

Banks are confronted with a diverse range of risks, necessitating comprehensive risk management. Climate risk demands an understanding of its implications for banking, prompting implementation of models to assess and manage its impact. Artificial intelligence (AI) in banking raises concerns about the privacy of sensitive information, and technical failures affecting regular banking operations.

In an interconnected world, contagion risk underscores the importance of identifying interdependencies, robust scenario planning, continuous monitoring, collaboration, and adaptive governance structures. Risks about cybersecurity and data privacy are intricately linked with reputational risk. Amid the adoption of external services like Cloud storage, regulatory frameworks prescribe stringent measures for outsourcing, particularly information technology outsourcing. Banks are compelled to implement robust third-party risk management strategies. Monitoring efforts must extend beyond internal operations to encompass the activities of third-party entities.

Assurance functions are expanding to deliver independent and objective evaluations. To enhance risk management, they must adopt a dynamic approach, collaborating with business leaders for a strategic perspective. The future of compliance envisions a streamlined, technology-driven process, minimising human vulnerability. 

Frequent regulatory changes affect banking operations, with customers demanding real-time interactions, regulators applying increasing levels of scrutiny, and stakeholders requiring assurance. Synergising the three lines of defence – risk, compliance, and internal audit – is imperative for navigating the constantly shifting risk landscape. Embracing advanced technologies, such as generative AI and machine learning, becomes essential for personalising experiences, enhancing customer lifetime value, and fortifying governance and risk management frameworks. 

With disruptive forces reshaping their foundational architecture, managing regulatory changes will enable banks to stay ahead. As banks move beyond being transaction platforms to act as facilitators guiding customers at each touch point, assurance functions must keep up. These functions should suggest ways to mitigate risks and liaison with regulators. It’s time for banks to leave their combative, reactionary, and retrospective stance and embrace a pragmatic, risk-focused approach.

The writers are senior advisor, (and former executive director of RBI); and partner and financial services industry leader (Deloitte India), respectively. The views expressed are personal. The column has been edited for space