When it comes to recognizing default risks in their own loan portfolios, there have certainly been easier times for banks than at present. According to a survey of risk managers, increasing threats are currently being seen in several areas.

Swiss Chief Risk Officers (CROs) are facing mounting challenges amid growing geopolitical uncertainty, trade barriers, and regulatory pressures, according to consulting firm AlixPartners in its latest «CRO Study» published on Friday.

The results are based on a survey of risk managers from large banks, specialist institutions, and digital banks in the DACH region (Germany, Switzerland and Austria).

According to the survey, 88 percent of the CROs surveyed have already adapted their existing early warning systems to identify default risks. A further 67 percent see geopolitical and economic uncertainties as the main negative factors for their loan portfolios. Added to this are trade conflicts with important partner countries such as the USA, which would further impair the stability of loan portfolios.

Operational Challenges

At the same time, sanctions and trading regimes would make everyday life more difficult for CROs. According to the survey, 45 percent of respondents cited the speed of regulatory changes in the sanctions environment as an operational challenge.

Swiss CROs are particularly challenged by the complexity of sanctions and their dependence on exports, the report continues.

Against this backdrop, CROs in Switzerland need to recalibrate their risk management. «Switzerland's export dependency on the USA, its role as a third country in the context of sanctions, and the increasing complexity of the relevant regulations require agile risk management,» says Veit Buetterlin-Goldberg, Co-Lead DACH at AlixPartners. «Banks' traditional early warning systems are under sustained pressure and must be strengthened.»

Automation and artificial intelligence offer significant potential. Yet many institutions are grappling with the complex task of aligning regulatory compliance with the demands of digital transformation.

Diverging Priorities

«In general, regulatory developments in the EU, the US, and Switzerland represent a major challenge for internationally active institutions due to diverging priorities,» emphasizes Ralph Kreis, Partner and Managing Director at AlixPartners in Zurich. «These developments lead to greater complexity, potential conflicts of objectives between national companies, and therefore also to higher costs for the institution as a whole.» These costs must be offset by savings in order to remain competitive.

Moreover, the shortage of skilled professionals is prompting a fundamental re-evalutaion. 50 percent of CROs are planning to expand their staff, particularly in analytical and technology-related functions. Meanwhile, 27 percent of respondents would consider relocating CRO functions to more cost-efficient regions. Expertise in compliance risk analysis and risk management remains particularly sought after.

IT and regulatory expenses are putting significant strain of budgets. According to 73 percent of respondents, IT costs – driven by digitalization, regulatory implementation, and the expansion of data infrastructure and cybersecurity – are now among the largest budget items.

Areas of Application

All respondents see AI as relevant for the future direction of risk management. However, only 28 are currently using corresponding applications systematically. This mainly relates to pilot projects for monitoring, modeling, and compliance.

Standardized, resource-intensive areas such as forecasting, transaction monitoring, reporting, and onboarding are seen as future areas of application. «The respondents emphasize the enormous potential for automation and standardization in credit processes, to move from a case-by-case approach to a portfolio perspective,» the authors write.

Practical Solutions

«AI offers banks considerable potential for optimizing efficiency and costs in the risk area, including through automation and standardization», says Partner & Managing Director Stefan Duderstadt. «We see a growing need for action in Switzerland, particularly in credit processes, transaction monitoring and fraud prevention.»

By working together with specialized providers, the integration of practical solutions could be accelerated and typical practical errors avoided, the consultants write.