Written by: Nicole B. Florian-Theriaque, CPA,
As we move into 2024, experts predict we are on track to remain in a challenging environment for financial markets. Continuing high inflation, escalating lending costs, tightened margins, increased regulation, and cybersecurity threats all remain relevant factors in the current risk landscape. Additionally, the Silicon Valley Bank, Silvergate, and First Republic collapses were defining moments in 2023. These events shined a spotlight on bank failures in the mainstream media, something that we haven’t seen much of since the 2008 financial crisis. This brings about increased scrutiny from regulators, investors, and customers, all driven by fear for their investment.
With all these factors in mind, what should financial institutions expect when it comes to the 2024 risk landscape?
Regulatory Scrutiny
The ABA Banking Journal recently released the top bank risks for 2024. First on their list, as expected, is regulatory scrutiny and rules. As banks face rules and issues from various regulators, they are trying to prepare their systems as well as get staff ready for compliance with new requirements.
Big changes include the final Community Reinvestment Act rules and Dodd-Frank Act Section 1071. The Community Reinvestment Act final rule was released to strengthen and modernize regulations implementing the Community Reinvestment Act (CRA) to better achieve the purposes of the law. The Dodd-Frank Act Section 1071 amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and submit to the Consumer Financial Protection Bureau (CFPB) certain data on credit applications for women-owned, minority-owned, and small business. As these requirements will bring the need for updating systems, software, and training, these changes will be especially difficult for community banks.
Torpago recently surveyed 100 community bank leaders across the United States looking at their focus for 2024. The top answer was becoming allies with fintechs to compete with larger banks. Respondents said they will be looking to partner with fintechs for regulatory needs. They also mentioned other needs, including payments and lending services. These partnerships will help community banks to gain access to innovative technologies, expertise, and resources in the highly competitive landscape.
Elevated Rates & Credit Issues
Moving into 2024, banks are also facing emergent elevated rates and credit issues. Banks are dealing with higher interest rates, increasing deposit costs, and slower lending due to interest rate fears squeezing margins. Interest-rate volatility in the past few years is also increasing focus on asset-liability risks.
As bank margins tighten, some loans are also showing signs of deterioration. According to the ABA Economic Advisory Committee, delinquencies for both consumer and commercial debt remain low but are rising. There are a few commercial real estate sectors facing fundamental changes such as malls, retail shopping plazas, and office space due to online shopping and the pandemic. As commercial loans mature, banks will have to decide if rental incomes justify refinancing these loans.
This is not only an issue for larger banks, but also for community banks as commercial real estate can be a significant portion of their loan portfolio. Torpago’s survey showed that there is an increased focus on customer experience and customer retention. Community banks are looking to enhance or add digital banking, mobile banking, branch experience, lending programs, and credit card programs. These priorities are particularly relevant in the face of uncertain economic climate and the need to strengthen their relationship with existing customers as well as attracting new customers.
Cybersecurity & Technology
As cybersecurity continues to be a top risk for the United States, artificial intelligence (AI) has provided criminals with more tools and techniques. Banks need to ensure not to cut costs in technology as they need to keep up with AI’s ability to fool voice- and knowledge-based authentication procedures. Torpago’s survey showed that community banks are finding in the rapid pace of technological advances that they need to update their legacy infrastructure. 88.7% of respondents noted that data security and accuracy along with web and mobile application interfaces were their attention areas for infrastructure modernization. Cost and limited resources continue to be a problem community banks face in updating infrastructure, again pointing to a theme for community banks gaining fintech partnerships in 2024.
The evolving risk landscape of 2024 can seem turbulent for financial institutions, but being aware is half the battle. With a better understanding of the concerns facing the banking industry, your organization can prepare to weather the storm. If your financial institution needs assistance – whether it be regulatory compliance, cybersecurity, tax planning, or something else entirely – reach out to our experts at Wolf.
