Balancing investment risks in a volatile economic environment

In the face of mounting business risks and a landscape characterized by volatility, leaders in the financial institutions (FI) industry are finding it increasingly difficult to secure stability, competitive advantage, and sustainable success.

Petra Schmidt (pictured above), Aon’s global financial institutions commercial leader, said that the industry is navigating through a period marked by rising interest rates, a tight talent market, escalating cyber security risks, and growing geopolitical threats. These factors are compelling FIs to reevaluate their existing frameworks and strategies to balance the management of financial and non-financial risks while pursuing opportunities for future growth.

Amid this challenging environment, Aon suggests a holistic approach to risk management as the key to enabling leaders to make informed decisions, utilize the appropriate tools, and foster innovation. This approach not only addresses immediate challenges but also builds resilience and agility to identify growth opportunities and navigate future uncertainties.

Streamlining costs, leveraging tech

In the era of rapid digitalization, the integration of generative AI, and the blending of traditional banking with fintech culture, financial organizations are urged to evaluate their talent strategies and develop stable talent pipelines. However, the industry is faced with the loss of key digital skills among 70% of financial organizations.

In response, Schmidt explained that companies must strike a balance between managing costs and acquiring essential AI talent to maintain customer satisfaction and employee engagement. FIs are encouraged to build workforce resilience as part of their operational resilience, creating an environment that supports agility and resilience.

With the generative AI market expected to surge, FIs also have an opportunity to revolutionize their operations, driving efficiencies and cost savings. The adoption of AI can enhance customer service, fraud detection, and financial planning.

However, this investment must be balanced with the management of associated risks, such as cyber security threats. Aon’s analysis reveals that automation and technology could disrupt 14% of roles within FIs, highlighting the need for strategic digital talent initiatives.

Revising the M&A playbook and bolstering cyber resilience

The US banking market is witnessing significant shifts, presenting new opportunities for mergers and acquisitions. Schmidt noted the aftermath of the Silicon Valley Bank failure and the resultant transfer of funds indicates a trend towards larger, more stable institutions.

With this in mind, FIs are advised to consider building AI capabilities and address various deal risks through M&A strategies, capitalizing on market consolidation and technological advancements.

On the cyber side, as digitalization accelerates, FIs also face an increase in cyberattacks. The industry has seen a significant rise in suspicious activity reports, emphasizing the need for robust cyber security measures.

For this, Aon suggests prioritizing cyber security investment and due diligence to protect value from investments. Implementing a holistic cyber resilience strategy is crucial for balancing technological growth with protection against evolving threats.

Focusing on a greener future

The finance community is leading efforts to support global emission reduction goals through sustainable investment and partnerships. With growing regulation and consumer demand, sustainable investing offers opportunities for growth, risk-adjusted returns, and asset diversification.

FIs can enhance their reputation and financial performance by taking meaningful action towards green investments, aligning with consumer preferences for environmentally sustainable products and services.

“The current and future operating landscape for FIs demands that both leaders and workforces can adapt to address increasing levels of volatility,” Schmidt said. “It’s never been more important for leaders to avoid the silos that inhibit a broad, strategic approach to risk and instead, work with a partner who can look across the whole enterprise to balance investment with efficiency.”

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