Explore the operational and technology risks that financial institutions in Australia must navigate amidst market volatility, and the importance of resilience and utilizing new technologies such as generative artificial intelligence (AI) to help address risks of the future.

Watch more from the New Monetary Order Video Series and discover how financial institutions are adapting to the evolving monetary landscape.

Jacob Hook

Hello everybody. I'm Jacob Hook, Oliver Wyman's managing partner for Asia Pacific. I'm here with Catherine Brown, a partner in our Finance and Risk practice to talk about some of the risk issues that she's been working on in the Australian market. Welcome, Catherine.

Catherine Brown

Thanks Jacob. Really looking forward to the conversation.

Jacob

I want to start, Catherine, with talking about the New Monetary Order in Australia. This is a topic we've been researching for a while, which is really about digging into how the higher for longer interest rate environment is affecting financial institutions in the country. How do you see this at the moment?

Catherine

Still early days, Jacob. We need to be ready for multiple different scenarios to emerge. It's possible that credit quality might deteriorate further over the coming months, labor markets showing signs of weakness, and profitability is certainly under pressure, as is growth. I think as far as the banks are concerned, bank capital is in a much better place than it was say 10 years ago. 

What worries me a little bit more is that profitability point and the need for discipline, cost management, and potentially also pivoting the business. And management of non-financial risks. Whereas financial risks, it's a little bit easier to implement a new risk management approach. Non-financial risks require a lot of embedding and behavioural change and are also quite rapidly evolving.  Things like conduct risk, technology risk, [or] operational risk more broadly, for example. Things that I think banks and other financial institutions need to think very carefully about over the coming years.

Jacob

In that operational risk space, there's a lot of focus these days on the topic of resilience, which is driven at least part by APRA's CPS 230 regulation. Could you talk a little bit more about what you're seeing in the resilience space?

Catherine

My view on resilience is that this is tremendously important for all types of financial institutions, plus there's a lot that we can think about under resilience. I would really focus on risk governance and risk management, and how healthy your risk governance and management are. The analogy I'd use is exercise of the human body and muscles. You need to develop strength, and you also need to develop speed and agility in order to weather the different types of scenarios that we might experience over the coming years. 

This exercise or training really needs to happen in a couple of key areas. One of them, for example, is lessons learned, right? When something goes wrong elsewhere, taking the lessons within the financial institution, doing the read across, figuring out what we can learn from it. Another area where I really think that the industry needs to train is on delivering change. Too often firms know that something needs to be addressed, they know what they need to do about it, but the execution of delivery takes much longer than anticipated. Technology risk, for example, is a space that's been moving very rapidly over the past five years.

Jacob

I totally agree. And technology risk, we heard a lot about last year when Silicon Valley Bank collapsed, and one of the key culprits was identified as being the speed at which deposits moved out of the bank and the role of technology in enabling that — is that something particularly you're concerned about?

Catherine

Very much so. Technology amplifies or magnifies risk issues when they arise, it has a potential to, in a good way or in a very bad way. And SVB, it's interesting when you compare that to Washington Mutual for example, which was around 2008. Big bank failure, it took 16 days for the bank failure to happen. With SVB, it took one. That's a real step change in how quickly things can go wrong if they're not correctly managed, if you don't have that fitness that we were talking about earlier.

I certainly think that managing tech risk is something that firms need to focus on, but I bring it back again to risk governance. Sure, we need to understand the impact of social media and digital banking, but SVB's failure I think was also a matter of the board and management not being across and not having deep enough understanding of the risks that they face. The boards need to be nosy in understanding what's going on within the financial institution to really be able to play the role that we need of them.

Jacob

You mentioned technology affecting risk in a good way as well as in a bad way. I'm really interested in the upside and the opportunity from technology. How do you see that playing out in the risk space for the financial institutions?

Catherine

I'm really excited about this, Jacob, on multiple fronts. I think that new technologies and use of analytics and generative AI, for example, can help with profitability. They can help with getting to better customer outcomes and they can help with risk management both within the financial institution as well as on an overall system level.

A good example where you get those three is hardship. It's possible to use behavioural data from customer's transactions to predict when a customer's going to enter hardship. You can do that a month or two before they actually would've realized themselves and come to the bank to apply based on information on bill payments, for example, declining cash balances, income to the account, and whether that has stopped or significantly diminished. Having those early warning signals and the ability to intervene with customers early means greater ability to help them, greater ability to tailor solutions, and it’s a better outcome for everyone.

Jacob

Thank you. That example of hardship I think is particularly compelling. The way it really outlines how the application of technology to a risk issue can also create more customer benefit, can support the bank's efforts to build, improve its reputation in the community, and really improve its overall social contribution.

So maybe to wrap us up today, Catherine, what are the one or two things that you think that industry executives should be focussed on right now given these topics we've been talking about today?

Catherine

I pick two, Jacob. The first one is start building those behavioral models and thematics that allow you to do more with the existing data that you have within your business for profitability, for customer outcomes, for risk management, and the greater good. And the second one is, are you future fit? Test your risk fitness. That would be my advice to executives.

Jacob

So, get a health check.

Catherine

Exactly. 

Jacob

Thank you very much, Catherine. That's been really interesting.

Catherine

Thank you, Jacob. Really enjoyed it.

Jacob

And thank you everybody for joining us today.

Explore the operational and technology risks that financial institutions in Australia must navigate amidst market volatility, and the importance of resilience and utilizing new technologies such as generative artificial intelligence (AI) to help address risks of the future.

Watch more from the New Monetary Order Video Series and discover how financial institutions are adapting to the evolving monetary landscape.

Jacob Hook

Hello everybody. I'm Jacob Hook, Oliver Wyman's managing partner for Asia Pacific. I'm here with Catherine Brown, a partner in our Finance and Risk practice to talk about some of the risk issues that she's been working on in the Australian market. Welcome, Catherine.

Catherine Brown

Thanks Jacob. Really looking forward to the conversation.

Jacob

I want to start, Catherine, with talking about the New Monetary Order in Australia. This is a topic we've been researching for a while, which is really about digging into how the higher for longer interest rate environment is affecting financial institutions in the country. How do you see this at the moment?

Catherine

Still early days, Jacob. We need to be ready for multiple different scenarios to emerge. It's possible that credit quality might deteriorate further over the coming months, labor markets showing signs of weakness, and profitability is certainly under pressure, as is growth. I think as far as the banks are concerned, bank capital is in a much better place than it was say 10 years ago. 

What worries me a little bit more is that profitability point and the need for discipline, cost management, and potentially also pivoting the business. And management of non-financial risks. Whereas financial risks, it's a little bit easier to implement a new risk management approach. Non-financial risks require a lot of embedding and behavioural change and are also quite rapidly evolving.  Things like conduct risk, technology risk, [or] operational risk more broadly, for example. Things that I think banks and other financial institutions need to think very carefully about over the coming years.

Jacob

In that operational risk space, there's a lot of focus these days on the topic of resilience, which is driven at least part by APRA's CPS 230 regulation. Could you talk a little bit more about what you're seeing in the resilience space?

Catherine

My view on resilience is that this is tremendously important for all types of financial institutions, plus there's a lot that we can think about under resilience. I would really focus on risk governance and risk management, and how healthy your risk governance and management are. The analogy I'd use is exercise of the human body and muscles. You need to develop strength, and you also need to develop speed and agility in order to weather the different types of scenarios that we might experience over the coming years. 

This exercise or training really needs to happen in a couple of key areas. One of them, for example, is lessons learned, right? When something goes wrong elsewhere, taking the lessons within the financial institution, doing the read across, figuring out what we can learn from it. Another area where I really think that the industry needs to train is on delivering change. Too often firms know that something needs to be addressed, they know what they need to do about it, but the execution of delivery takes much longer than anticipated. Technology risk, for example, is a space that's been moving very rapidly over the past five years.

Jacob

I totally agree. And technology risk, we heard a lot about last year when Silicon Valley Bank collapsed, and one of the key culprits was identified as being the speed at which deposits moved out of the bank and the role of technology in enabling that — is that something particularly you're concerned about?

Catherine

Very much so. Technology amplifies or magnifies risk issues when they arise, it has a potential to, in a good way or in a very bad way. And SVB, it's interesting when you compare that to Washington Mutual for example, which was around 2008. Big bank failure, it took 16 days for the bank failure to happen. With SVB, it took one. That's a real step change in how quickly things can go wrong if they're not correctly managed, if you don't have that fitness that we were talking about earlier.

I certainly think that managing tech risk is something that firms need to focus on, but I bring it back again to risk governance. Sure, we need to understand the impact of social media and digital banking, but SVB's failure I think was also a matter of the board and management not being across and not having deep enough understanding of the risks that they face. The boards need to be nosy in understanding what's going on within the financial institution to really be able to play the role that we need of them.

Jacob

You mentioned technology affecting risk in a good way as well as in a bad way. I'm really interested in the upside and the opportunity from technology. How do you see that playing out in the risk space for the financial institutions?

Catherine

I'm really excited about this, Jacob, on multiple fronts. I think that new technologies and use of analytics and generative AI, for example, can help with profitability. They can help with getting to better customer outcomes and they can help with risk management both within the financial institution as well as on an overall system level.

A good example where you get those three is hardship. It's possible to use behavioural data from customer's transactions to predict when a customer's going to enter hardship. You can do that a month or two before they actually would've realized themselves and come to the bank to apply based on information on bill payments, for example, declining cash balances, income to the account, and whether that has stopped or significantly diminished. Having those early warning signals and the ability to intervene with customers early means greater ability to help them, greater ability to tailor solutions, and it’s a better outcome for everyone.

Jacob

Thank you. That example of hardship I think is particularly compelling. The way it really outlines how the application of technology to a risk issue can also create more customer benefit, can support the bank's efforts to build, improve its reputation in the community, and really improve its overall social contribution.

So maybe to wrap us up today, Catherine, what are the one or two things that you think that industry executives should be focussed on right now given these topics we've been talking about today?

Catherine

I pick two, Jacob. The first one is start building those behavioral models and thematics that allow you to do more with the existing data that you have within your business for profitability, for customer outcomes, for risk management, and the greater good. And the second one is, are you future fit? Test your risk fitness. That would be my advice to executives.

Jacob

So, get a health check.

Catherine

Exactly. 

Jacob

Thank you very much, Catherine. That's been really interesting.

Catherine

Thank you, Jacob. Really enjoyed it.

Jacob

And thank you everybody for joining us today.