What Is the New Reality for Risk in Banks?

2023 has been the year of banking — and not in a good way.

Things started on shaky ground as the global economy entered an economic downturn. At the time, the Financial Services sector was already rattled by the collapse of the crypto exchange FTX, as well.

Since January, things have only gotten worse. As one financial crisis after another plays out, it’s worth asking an important question. How is the current instability in the banking world setting up the future?

The Banking Industry Remains the Definition of Chaos

The current banking crisis kicked off in earnest in early March when Silicon Valley Bank (SVB) collapsed, and two days later Signature Bank, New York, failed as well, sparking a wave of concern throughout the global economy. SVB may have been the first bank to have failed by social media posts which encouraged large depositors who held accounts in excess of the FDIC limits to bail. Other institutions began to struggle, and governments stepped in with loans to prop up banks with high-risk deposits. The backdrop of inflation driven by government spending, high interest rates, and recessionary fears sets the stage for unpredictability.

As of this writing, the most recent twist in the drama is the unhappy union between the Swiss banking giants Credit Suisse and UBS. In late April, the latter reported a 52% slide in first-quarter income, part of which was due to litigation preparation as it absorbs its previous rival. Adding insult to injury, UBS’s chief executive forebodingly warned that “difficult decisions” were still coming.

Government money is everywhere. Multi-million-dollar legal proceedings and acquisitions are dragging on for months. Risk is still rampant, and the threat of further chaos remains high. The question is, what’s next for this hectic yet critical part of the global economy? More specifically, what is the new reality of the inherent risks that come with banking?

The New Reality of Risk in Banking

With the crisis still unfolding, how are governments, leaders, and consumers around the world going to approach the evolving risks involved with banking? While nothing can be predicted with certainty, there are a few questions to ask and observations to be made.

Let’s start with governmental entities. The Federal Reserve System has spent months cranking up interest rates to combat inflation. This has created plenty of destabilization already. If this monetary policy continues, will it lead to another wave of bank failures?

The government may be able to step in and bail out failed banks, but what if its relentless monetary policy is creating a feedback loop? What is the end game here? Does the Fed even know what it’s doing? Is it genuinely investing in financial stability, or is it crossing politics into the banking world? While it may be the ultimate security blanket, the government is hardly helping to calm the chaos, and this looks like it may be the new status quo for a while.

What about the banks themselves? The mega-bank union of UBS and Credit Suisse may be just the beginning. If consolidation becomes the new norm, what will happen on the consumer end of the deal if the relationship-driven banking of small and regional banks goes away?

And then there are the end users. With banking in turmoil, will Private Equity Firms be where business borrowers and entrepreneurs turn for funding moving forward? Heaven knows Private Equity will be all too willing to fill the gap.

And consumers? How do they factor into all of this? For most people, banking is just another commodity. They use local lenders to buy mortgages that are promptly sold off to larger entities. They use services without knowing anything about the bank behind the online portal or mobile app. Will consumers feel the impact of so much high-level risk and failure, or will everyday financial activity continue as business as usual?

Safeguarding Against the Unknown

The current state of the Financial Services sector serves as a reminder for business leaders in every industry. It doesn’t matter if you’re working with Stanton Chase to fill a key financial position, like a CFO, or you’re looking for a Chief Executive Officer, Chief Technology Officer, Chief Risk Officer, Chief Compliance Officer, or any other tangential role (financially speaking). It makes sense to fill your executive leadership team with proven, capable, top-performing individuals who are imaginative problem solvers who will reduce risk, improve crucial communications, and maintain the vision and discipline to keep the organization out of trouble.

“It makes sense to fill your executive leadership team with proven, capable, top-performing individuals who are imaginative problem solvers who will reduce risk, improve crucial communications, and maintain the vision and discipline to keep the organization out of trouble.”

The need for consistent quality talent in the upper echelons of business is always important. In the months and years ahead, it may become the deciding factor on whether companies can sink or swim as they navigate fresh risks in this new banking reality.

About the Author

Peter Deragon is a Managing Director at Stanton Chase Los Angeles. He is also active in the CFO Practice Group and Financial Services, where he started his career. He has 30-plus years of experience as a trusted advisor and manager in B2B environments. In his free time, Peter supports charitable organizations, especially those focused on ocean stewardship.