2024 will bring increased credit risk for the entire banking sector worldwide

Luc Williams

According to the authors of the publication Deloitte Financial Markets Regulatory Outlook 2024, 2024 will be a critical moment for the entire industry due to the entry into force of a number of regulatory changes. This includes, among others: atthe EU 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) or UK Consumer Duty.

A difficult year for European banks

Implementation of these solutions is delayed due to persistence risk among others geopolitical or macroeconomic, but ultimately they may bring many benefits, including eliminating the need for intervention by supervisory authorities and the related remedial costs,” experts noted, adding that this is all the more important because the outlook for European economies is ‘highly uncertain’and from 2024, supervisory authorities in Europe will be on high alert.

The authors of the report also pointed out: “apparent signals” intended to indicate the good condition of the banking sectoro. They emphasized that the stability of the entire system is demonstrated by the condition of entities in the most difficult situations, e.g. those with the smallest capital buffers.

Warning for bankers

They reminded that bankruptcy of several mid-sized regional banks in the US in 2023reminded us of two things: “first, that customer and investor trust in banks may quickly disappearsecondly, that Solid liquidity buffers must be accompanied by several elements necessary to maintain system stability” and mentioned that these include effective risk management, recovery plans and “proactive” institutional supervision, as well as cooperation and responsibility of key stakeholders – banks, supervision, government and borrowers.

The authors of the report noted that banks and other financial institutions are facing challenges “increased credit risk”. They added that the authorities responsible for financial stability signaled “particular” concerns in relation to two areas: the commercial real estate sector (particularly office space) and private credit markets. “At the same time, in the face of persistent cost of living pressures, companies should strive to ensure fair outcomes for vulnerable borrowers and, in the event of failure, expect proactive intervention by regulators,” experts suggest.

It’s time for greater involvement in climate protection

Deloitte’s report indicates that companies should step up efforts to plan for transformation in climate-related areasfinancial risk management and avoiding greenwashing practices. According to its authors many entrepreneurs still “don’t fully understand” this phenomenon and how it affects the company’s products and liabilities. They noted that European financial supervisory authorities plan to publish final recommendations to the European Commission in May 2024 regarding possible changes to the EU regulatory framework on greenwashing.

“In 2024, we expect policymakers to focus more on the role of the regulatory framework in… financing the transformation. “Fit for 55” climate risk analysis in the EU will assess the ability of the financial system to support the green transformation of economies. Currently, there are many difficulties in financing the projects that companies plan to switch to green business modelespecially in the context of the lack of consistency of terminology in the regulatory area,” noted Przemysław Szczygielski, partner managing the risk management department in Deloitte in Poland and the Baltic countries.

Pensions from the insurer

The report noted that also life insurance and pensions sector currently faces many opportunities and challenges. “This is due to a combination of higher interest rates and inflation, as well as significant changes to the prudential supervision systems (Solvency UK and Solvency II),” it said.

Experts predict that in the coming years will accelerate the pace of transfer of defined benefit (DB) pension plans to insurers. “Insurers, by implementing effective risk control, can use these trends to develop other areas, offering customers products more tailored to their needs, which in turn may contribute to achieving better financial results,” suggested the authors of the report.

They added that climate changes will affect the level of compensation and require insurers to actively manage and cooperate with customers. “A proposition worth considering is to provide customers with information about the climate and offer them a range of products that meet consumer needs regarding sustainable investments,” noted Marcin Warszewski from Deloitte.

Experts emphasized that to meet market expectations, companies should: innovate, maintain a solid insurance discipline of properly assessing risk and making sound decisions regarding price and scope of service; and assess how the benefits of regulatory changes can be exploited.

author: Anna Bytniewska


Luc's expertise lies in assisting students from a myriad of disciplines to refine and enhance their thesis work with clarity and impact. His methodical approach and the knack for simplifying complex information make him an invaluable ally for any thesis writer.