Insights

5 June 2024

FDIC Risk Review points to more GRC hiring

The FDIC’s 2024 Risk Review paints a complex picture for the U.S. banking sector. While the industry demonstrated resilience in 2023, several key risks demand close attention from financial professionals, regulators, and bank executives, with clear implications for hiring and recruitment.

Economic Conditions and Banking Performance

The economic landscape in 2023 defied initial expectations, exhibiting strong growth despite elevated interest rates. Consumer spending, buoyed by a tight labor market, was a significant driver of this growth. Inflation moderated but remained above the Federal Reserve’s 2% target, keeping monetary policy tight. Financial markets were volatile but ended the year on an optimistic note, with equities rebounding and corporate bond conditions improving, although bank stocks underperformed,

Banking Industry Resilience Amid Challenges

The banking industry demonstrated resilience after facing early stress in 2023. Despite challenges, full-year net income remained high, with overall asset quality metrics favorable and liquidity positions stabilizing by the end of the year. For community banks, however, net income declined due to higher noninterest expenses and losses on securities sales. Deposit levels fluctuated but saw an uptick in the fourth quarter, reflecting a stabilized liquidity position.

Market Risks: Interest Rates and Deposits

Higher interest rates and an inverted yield curve posed significant market risks, compressing net interest margins for many banks. Deposit outflows were notable, particularly in the first quarter, driven by uninsured deposits. In response, banks reduced securities to manage liquidity needs and turned to higher-cost borrowings. This shift increased funds costs and greater reliance on wholesale funding, particularly among community banks, weakening their liquidity positions.

Credit Risks: Commercial Real Estate and Consumer Loans

Credit risks varied significantly by loan type in 2023. Commercial real estate (CRE) markets were mixed, with office and retail sectors showing weakness. High interest rates and declining property values challenged the refinancing of CRE loans, particularly for office properties. Residential real estate saw reduced activity due to high mortgage rates, although home prices rose due to limited supply. Consumer loan performance weakened, with credit card and auto loans showing increased delinquency rates. Agricultural and small business loans, however, remained relatively stable.

Operational and Cyber Risks

Operational and cyber risks continued to threaten the banking sector, with ransomware and supply chain attacks posing significant concerns. Geopolitical events heightened the risk of cyber-attacks on banks, while traditional threats like check fraud remained prevalent. Adopting quantum computing and artificial intelligence introduced new risks to critical infrastructure systems.

Climate-Related Financial Risks

A record number of billion-dollar climate events in 2023 highlighted climate-related financial risks. While these events are sometimes covered by insurance, policies have become more expensive and less available, increasing the financial burden on banks. The banking sector faces rising risks from severe weather and climate events, necessitating enhanced risk management strategies.

Crypto-Asset Risks

Though limited in direct exposure, crypto-asset risks presented complex challenges for the banking industry. The FDIC and other federal agencies closely monitored crypto-related activities due to their potential for market disruption and the difficulties in assessing their full impact. The volatility and regulatory uncertainties surrounding crypto-assets require vigilant oversight.

Demand for Governance, Risk, and Compliance Roles

The demand for governance, risk, and compliance professionals has increased due to heightened market and credit risk scrutiny. Banks are strengthening their risk management frameworks, creating a need for skilled professionals. Regulatory compliance has become more critical, especially with the complexities introduced by climate-related financial risks and crypto-assets. Additionally, there is high demand for internal auditors to ensure strong internal controls and adherence to regulatory standards.

The 2024 Risk Review highlights the importance of proactive risk management and the need to adapt to new and emerging risks in the banking industry as the financial landscape becomes more complex. This will lead to increased demand for governance, risk, and compliance expertise.

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