Conglomerates face complex risks, need better governance
Anneli Tuominen of the ECB Supervisory Board discussed the escalating complexity and unique vulnerabilities faced by financial conglomerates. Speaking in Helsinki, she outlined how these cross-sectoral groups navigate a challenging risk landscape.
The fog of war in banking and finance
Anneli Tuominen highlighted a significantly more complex risk landscape for banks, likening it to 'the fog of war' in finance.
This complexity stems from three factors: persistent traditional challenges like credit and market risk, the growing magnitude of non-traditional threats such as cybersecurity, digitalisation, and geopolitical instability, and the intricate interactions between these risk categories.
Geopolitical events, for instance, can amplify credit and market risks through channels like altered growth expectations or interest rate changes.
This necessitates banks to monitor a broader spectrum of risks and their various materialisation channels, especially amidst high policy uncertainty, complicating identification and remediation processes.
Conglomerates' amplified vulnerabilities
Financial conglomerates face distinct vulnerabilities from their diversified models.
They manage unique underwriting risks from insurance, alongside traditional credit risks.
A key concern is capital double-gearing, especially under the 'Danish Compromise', which links insurance market movements directly to banking capital.
Operational resilience is amplified: conglomerates have dual cyber/ICT risk profiles, larger attack surfaces, and interconnected AI workflows that can spread risks group-wide.
Their double-sided exposure to non-bank financial institutions (NBFIs) via both banking and insurance further increases vulnerability to market shocks.
Complexity demands robust governance
The complex interplay of risks, amplified by financial conglomerates' unique structures, demands heightened vigilance.
Effective governance is paramount, requiring management to deeply understand and oversee digital vulnerabilities.
Proactive, coordinated supervision remains crucial to navigate this 'fog of war' and ensure overall financial stability.