Here's what's worrying chief risk officers

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Risks related to this year's banking failures are taking up more space in the minds of chief risk officers at U.S. banks. 

Half of chief risk officers saw treasury and asset liability-management risks as a top concern in 2023, according to a survey of 51 chief risk executives conducted by the Risk Management Association, a trade group, and consulting firm Oliver Wyman. Just 16% of executives said the same in 2022.

The survey results highlight the lasting impact that last spring's banking crisis has had on U.S. financial institutions. The crisis saw the failure of three large banks and runs at several others. But even banks that made it through the spring with their balance sheets intact began to re-examine their own vulnerabilities after the failures. 

"It was an important lesson learned: how quickly contagion risk can affect financial institutions," one survey respondent said.

The survey drew on responses from chief risk officers at 51 U.S. financial institutions recorded in the summer of 2023. The banks included those with less than $100 billion in assets and those with more than $100 billion in assets.

About 90% of chief risk officers surveyed reported plans to upgrade at least one of their treasury risk management capabilities, and two-third reported plans to upgrade five or more. Nine in 10 banks reported wanting to improve their liquidity stress testing abilities. The improvements could include changes to the scenarios, models, methodologies or assumptions used for the test.

Improving approaches to interest-rate risk management also ranked high for the chief risk officers. About 85% of respondents listed revamping this area as a top priority moving forward, according to the survey results.

"Interest-rate risk and liquidity risk management matter — despite the fact that these areas have received limited supervisory attention in the past decade," one chief risk officer surveyed said.

The next three treasury risk capabilities most likely to be targeted for improvement are enhancement to risk management within the securities portfolio (70%), cash flow forecasting (59%) and other liquidity-related initiatives (52%).

"The banks that have more maturation to do in their [treasury management and liquidity risk] practices probably feel a bit more nervous," said Michael Duane, a partner in the finance and risk practice at Oliver Wyman. 

Chief risk officers said they spent more time thinking about financial risks, including the increased focus on treasury risks, in 2023 than last year. In addition to that, bigger financial institutions were likely to spend more time focused on financial risks than their smaller counterparts, the survey found. 

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Additionally, next year is likely to bring risks beyond what was discussed in this survey, primarily with operational risk tied to the ongoing Basel capital debate. Regulators have proposed new capital rules that the banking industry has called "unprecedented." The proposed rules would require banks with at least $100 billion in assets to boost the amount of capital set aside by an estimated 16%.

Most CROs said they expect attention from regulators to increase in 2024. About 89% of the executives anticipate an increase in liquidity-related regulatory and supervisory issues at peer banks next year. And 81% of chief risk officers expect a jump in capital-related regulatory findings in 2024.

"If you look at large regional banks, certainly on a median basis, capital has been built over the course of the year," said Allen Tischler, senior vice president of the financial institutions group at Moody's Investor Services.