What’s the impact of high prices, interest rates, and inflation on banks’ credit portfolio? Will green investment today still be accepted as green in 2025 or 2028? How can we really assess the risks AI poses to the business? These are the questions that occupy Jason Forrester, Global Head ERM & Deputy CRO SC Bank, Standard Chartered Bank. Watch this interview, as we talk to him about liquidity risk, the challenges of spotting greenwashing, and model risk management.
Tell us about the biggest shocks in the industry you’ve seen this year.
There are probably two key areas we’re looking at. One is the whole macroeconomic environment, the continued high commodity prices, high interest rates, high inflation, the impacts of the Russia-Ukraine war… What’s the impact of that on our credit portfolio, both from a retail and a corporate perspective? And also sovereigns because they are equally impacted by those risks, and that’s something we have to carefully manage and monitor.
The second big risk is obviously the failure of a couple of well-known US and European banks. That’s taught us that liquidity is still a key area of risk for banks, and the speed with which it can happen and the fact that you need to get your social media communications right around it. I think there’s a lot that we can learn as an industry.
As a result, what risks do you see coming to the forefront?
If we take the second item first – liquidity risk. The speed with which money was removed from those two banks is far greater than anything we’ve seen before. That was compounded by the digital payment infrastructure which wasn’t around in 2008, GFC, or the impact that social media has on communications around banks.
So that means our stress tests are probably going to have to be faster and more severe. We’re going to have to look at alternate ways that we can shore up liquidity if we face a similar type of problem. We have to get our external communications spot on and quickly out into the markets.
I think when we look more broadly at the macroeconomic environment and the impact on the credit portfolio, that’s much more of a known risk and a known set of playbooks. Really, the focus is on stress testing and understanding which parts of our portfolios are exposed to these types of risks and then looking at ways of mitigating that risk in advance of it happening.
It’s interesting how such mature risks are in question now as a result of a few years of volatility. How’s the rest of 2023 looking, in your opinion?
For the rest of 2023, from a macro perspective, high interest rates have benefits to certain industries and impact others. These things always play out. There are always going to be winners and losers, and we just need to be mindful.
I think the other big risk that we’re seeing that’s coming up through the rest of 2023 and onwards is around greenwashing. We’re seeing a lot of regulation being put into the market around sustainability, environment factors, climate risk, what is a green product… I think when I look forward, maybe not just over 2023 but over the next 5-10 years, the likelihood is that there will be look back risk where people say “you said something was green in 2023”. Is it still green when you look at the rules in 2025 or 2028? I think that is the next big wave of potential litigation risk for banks and something that we need to be actively managing now at the very start of the process.
It feels as if a lot of people got burnt by the greenwashing issue and by just having the foresight to even spot these. What practical and strategic challenges do you see here, especially to do with greenwashing?
With respect to greenwashing, the inconsistent regulation doesn’t help. As a global organisation where you’re looking to issue global products, clearly they can be treated in different ways by different regulators and legal systems around the world. That’s a challenge. So we’ve got to come up with something that’s market and industry specific. We have to think very clearly about disclosure. Clearly disclosure isn’t a panacea to all problems but the more we can get the potential downside risks and the potential risks of future regulation [the better].
As an industry, we’re all taking legal advice, but that legal advice is self-developing because this is such a new area. I think we need to be communicating really well to our stakeholders, our boards, our investors, our regulators around the potential risk that we may face going forward, how we’re mitigating it, and actively monitor our mitigation strategies as we go through the next 5-10 years.
I also wanted to ask you about some of the emerging risks that might not necessarily be at the forefront at the moment but might be crucial to address in the next 5 years. Do you have anything that’s still under the radar?
I think the whole use of artificial intelligence. (Although I would say it’s not really artificial intelligence, but machine learning as a technique.) I think there’s a lot of potential hidden problems with that in terms of unintentional bias and wrong decision making. We saw this in the GFC with models; models didn’t work. We didn’t really understand models how models worked and we put in place an entire model risk framework starting with SR 11-7.
AI is a different type of model and I think certainly, including it in some of our model risk frameworks is important. But having the internal knowledge and experience to independently test and validate AI models, which are very different than normal statistical models, is something as an industry, we’re going to have to develop over the next 2-3 years because banks will undoubtedly turn to AI to help with cost challenges and to make their processes smarter and faster.
As a closing thought, I wanted to talk about RiskMinds International later in the year. What are you most excited to learn about and discuss?
For me, just meeting up with peers from other organisations, bouncing ideas off them, helping to build the network, speaking to people who are in the same industry and facing the same challenges… that’s what I love about RiskMinds.
In terms of topics, climate risk is still a massive focus for the industry and it’s only going to get bigger. We’re at the very start of implementing climate risk as a risk framework and methodology. So learning what other banks are doing, what is at the forefront of climate risk, is going to be really interesting.
And then I did note that AI is starting to come through. How, as a model risk function team, can we really assess the risks of AI? I’ll certainly be attending those sessions.
Finally, going back to the very first point I made, the industry has learned a lot given the failures of more than two major banks this year. Just understanding what other banks are doing and how they are changing their frameworks to adapt to those risks will be a useful learning experience.
