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2024: Banks Must Adapt to ESG and Risk Management Demands

FINANCE2024: Banks Must Adapt to ESG and Risk Management Demands

In 2024, finance industry companies will continue to operate in the challenging market conditions that have accompanied them for the past few years. Despite a decrease in inflation and a slowing down of interest rate growth, both these factors continue to negatively impact economic activity. The Deloitte advisory firm’s Financial Markets Regulatory Outlook 2024 report suggests that companies will also have to meet new ESG regulatory requirements and intensify efforts towards sustainable finance.

The latest version of Deloitte’s report discusses the main trends and regulatory phenomena and their impact on the financial services market. The structural changes discussed in the publication, driven by geopolitics, climate, and technological innovations, will shape the regulatory landscape and the operating environment for years, if not decades, to come.

According to the authors of the publication, 2024 will be a critical time for the entire industry due to the implementation of several regulatory changes. These include elements like the European Union’s Digital Operational Resilience Act, prudential reforms (i.e., Basel for EU and UK banks and Solvency II and Solvency UK for EU and UK insurers), the British consumer duty etc. The implementation of these solutions is delayed due to persisting risks such as geopolitical and macroeconomic risks. Nevertheless, they can bring many benefits, including the elimination of supervisory interventions and associated remedial costs. This is particularly significant considering that the prospects for European economies are highly uncertain, and from 2024, supervisory bodies in Europe will be in a state of high alert.

Banks and other financial institutions are facing heightened credit risk. Bodies responsible for financial stability have signaled particular concerns in two areas: the commercial real estate sector (especially office space) and private credit markets. At the same time, given the ongoing cost pressure, companies should strive to ensure fair outcomes for borrowers in difficulty, and in the event of failure, expect proactive supervisory intervention.

In Europe, sustainable development continues to transform the economy, creating new opportunities and changing business costs for financial service providers. Regulations are a significant factor driving these changes and are essential for companies planning to achieve net-zero emissions.

The insurance sector faces many opportunities and challenges, caused by a combination of higher interest rates and inflation as well as significant changes in prudential supervision systems. Insurers, by implementing effective risk control, can leverage these trends to develop other areas, offering customers products that better suit their needs, potentially leading to better financial outcomes. Another factor influencing the insurance industry will be climate change, which requires insurers to actively manage and cooperate with customers in terms of paying compensation for the consequences of extreme weather events.

Deloitte points out that companies should intensify efforts in planning the transformation in areas related to climate, financial risk management, and avoiding “greenwashing” practices. The economic and regulatory environment may create many development opportunities for property insurance in 2024. To meet market expectations, companies should: innovate (to meet changing customer needs); maintain solid insurance discipline, which involves proper risk assessment and making reasonable decisions regarding price and scope of service; and assess how the benefits of regulatory changes can be utilized.

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