Global Risk 2020: It’s Time for Banks to Self-Disrupt

For Banks, COVID-19 Makes Transformation That Much More Urgent

Challenges That Preceded the Crisis Will Be Increasingly Daunting in the Near, Medium, and Long Term; Banks Must Act on Multiple Fronts to Emerge in a Position of Strength, Says New Report by Boston Consulting Group

BOSTON—With economic profit already down globally before the COVID-19 outbreak, banks need to transform themselves significantly in order to manage expanding risks, serve customers effectively, and raise profitability to a sustainable level, according to a new report by Boston Consulting Group (BCG). The report, titled Global Risk 2020: It’s Time for Banks to Self-Disrupt, is being released today.

This tenth annual survey of the health and performance of the banking industry by BCG examines both the current pressures brought on by COVID-19 as well as the preexisting challenges that the crisis has intensified. The report emphasizes that banks can successfully weather the current storm and strengthen their market positions if they take the right steps now.

“These are both difficult and unprecedented times,” said Gerold Grasshoff, a Frankfurt-based BCG senior partner, coauthor of the report, and global leader of the firm’s risk management and regulatory compliance practice. “But they can also serve as a catalyst for banks to accelerate initiatives that have long been necessary—and that have progressed too slowly. Best-practice banks will turn the crisis into an opportunity to build more secure futures for themselves and for their customers.”

According to the report, banks need to take specific steps to optimally manage through the COVID-19 period, which BCG sees as evolving in three stages. These imperatives are to reinforce essential activities, anticipate downstream impacts, and accelerate digital transformation.

Reinforce essential activities. Effective crisis response will require banks to maintain strong liquidity and funding mechanisms. This step is clearly crucial—both for banks and for the broader economy. The support measures from governments and central banks will help considerably, but banks need to ensure that these measures reach the affected functions and clients effectively and efficiently. Banks must also shore up credit risk management. Although all industries will be impacted by COVID-19, the effects will vary by sector and client. Risk drivers specifically related to the COVID-19 outbreak are not currently captured by credit-ratings systems. Banks, therefore, need to ensure that they understand their positions and can mitigate issues quickly.

Further, banks need to update their compliance priorities. Compliance teams should assess projects on the basis of the bank’s risks and commitments, and determine which efforts will be required to deliver appropriate compliance. Compliance officers must also assess the resilience and adaptability of their operating models and understand how COVID-19 may impact the delivery of different processes.

Anticipate downstream impacts. We are currently experiencing a supply shock, a demand shock, and an oil price shock at the same time, affecting all regions—a different set of circumstances than those of the 2007–2009 financial crisis. Yet the impacts will be different across industries. Gauging those effects will require banks to invest in detailed scenario planning, differentiated by industry sector. Banks must also revisit their business continuity plans, looking not just at near-term impacts but at the wider ripple effects over the next 12 to 18 months. This planning must also extend to the operating model to ensure that banks have sufficient controls that address different types of risks and processes, such as those surrounding cybersecurity, anti-money-laundering, payments security, liquidity, and credit.

Accelerate digital transformation. Arguably, one of the most pernicious risks facing banks globally is not external volatility as much as it is a reluctance to shake up institutional practices and norms at their core. The tactical-improvement efforts that banks have attempted have not delivered the transformation needed. Last year, we wrote that digitization is the key to resilience in the banking industry. This year, the unprecedented challenges posed by the COVID-19 outbreak make the digitization imperative all the more urgent. Risk, treasury, and compliance functions can help banks respond to the present crisis and lay the groundwork for banks’ long-term success. By using AI, machine learning, and other advanced technologies and practices, banks can improve overall steering, deliver predictive real-time insights, and execute faster and more efficiently. Yet success requires a willingness to see disruption not as a threat, but as a lifeline.

“Banks interested in reducing the risks to their business, enabling integrated balance sheet management, and modernizing compliance must develop a clear digital strategy, redesign core processes, and establish the right digital enablers,” said BCG’s Gerold Grasshoff. “This report lays out the path to digitization and presents concrete examples of what that transformation looks like and the results it can achieve.”

A copy of the report can be downloaded Global Risk 2020: It’s Time for Banks to Self-Disrupt.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About Boston Consulting Group

Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we help clients with total transformation—inspiring complex change, enabling organizations to grow, building competitive advantage, and driving bottom-line impact.

To succeed, organizations must blend digital and human capabilities. Our diverse, global teams bring deep industry and functional expertise and a range of perspectives to spark change. BCG delivers solutions through leading-edge management consulting along with technology and design, corporate and digital ventures—and business purpose. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, generating results that allow our clients to thrive.

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