When Richard Nesbitt speaks, the banking sector ought to listen.
Nesbitt is CEO of the Global Risk Institute in Financial Services, a fast growing globally recognised research organisation in the management of emerging risks.
So it was a pleasure to sit down with Nesbitt when he visited London in September – among his other roles is Visiting Professor at the London School of Economics – to talk about risk.
Prior to taking his role with GRI, Nesbitt was COO of CIBC, with responsibility for the global operations of Wholesale Banking, Technology and Operations; Strategy and Corporate Development; CIBC’s International Operations, including CIBC FirstCaribbean International Bank and Treasury.
Founded by the government of Canada, the province of Ontario, Toronto-Dominion Bank and Manulife in 2011 Nesbitt says that GRI was created to capitalise on the strength Canada demonstrated in its risk management during the financial crisis.
While the GRI is expanding outside its Canadian base, in particular in the US and the UK, Nesbitt make a fair point when he comments on his domestic market.
“No equity support from government; Canada’s banks are tremendously strong, it has been a golden age in Canadian banking..” are just some of his very quotable soundbites.
GRI surveys of its members show that financial institutions have lately changed their views of the most serious danger facing their industry.
In 2015 it was “conduct risk/risk culture”.
“This year’s survey highlighted that the most acute worry was “cyber/IT risk”.
“In terms of cyber members feel quite vulnerable.”
In terms of cyber, the GRI advises members on fraud, money laundering, tax evasion, terrorist financing as well as fraudulent insurance claims.
According to Nesbitt, the GRI is giving members access to industry experts and equipping them with knowledge to help them mitigate threats, identify consumer trends and capitalise on new opportunities in technology.
Other notable changes include the increasing potential threat to the financial sector of climate change.
“Climate change has moved up from the 12th most serious risk to 8th in just two years and that is a huge change,” says Nesbitt.
“We have been promoting the fact that financial institutions have to spend more time thinking about the impact of climate change and the impact of public policy on climate change.
“But it is not universal. The pensions and insurance companies already are fairly focused but the banks themselves are less concerned about the direct impact of climate change.”
Climate change is a critical global concern that presents issues associated with warmer temperatures, increased water scarcity, and more frequent and severe weather events.
“All these factors threaten the financial sector and economic security. The physical risks of climate change present a clear threat to operations, but new investment opportunities and product offerings are also needed to respond to the changing world needs.
“The GRI is engaged in expanding financial sectors understanding of climate-related risks and specifically in identifying proactive responses.”
Looking ahead, Nesbitt is upbeat about how banks will cope with the threat posed by fintechs.
“Most fintechs will fail but some will succeed and so where are the Amazons, the ebays and Facebooks? They are out there-we just do not know which ones they are.
We might need ten years for that to play out.
“Fintechs partnering with fintechs are great for consumers but they are a threat as regards their potential to split away some high margin business on the fees side.
But banks will not go out of business because of fintechs.
Banks are not stupid and the most significant evolution in consumer finance in recent years is mobile banking-and who adopted that-the banks.
“I only use mobile banking now.”
Explosion of debt
Looking ahead: ‘We are at a precarious time in terms of the explosion in the amount of debt ”, says Nesbitt.
Explosion in the amount of debt and those low interest rates that have to be adjusted upwards and economies are based on Central banks buying the debt of countries, states and organisations – we could easily see stagflation.
Nobody knows how this will unwind. This cannot unwind without pain.
We are already eight years into an economic expansion and the average economic expansion post a recession is six years and at some point economies will slow down.
And this is all at a time when governments have less flexibility because they have increased their debt so much.
So banks simply must make sure they have prudent capital ratios and prudent leverage ratios.
“Now is the time to get the balance sheet in order and avoid excessive debt-a downturn is coming.”