CRO Outlook

Risk Management Predictions for 2022: Seeking Alternatives in Times of Uncertainty

Interest-rate risk, regulatory changes, supply-chain disruptions, credit risk and human-capital risk are among the threats that will likely be top of mind for risk professionals over the next 12 months, as they attempt to navigate unpredictable, pandemic-altered markets.

Friday, January 7, 2022

By Clifford Rossi

Starting this month, Clifford Rossi - a former banking CRO and a current professor at the University of Maryland's Robert H. Smith School of Business - will be taking over as our CRO Outlook columnist. We'd like to thank Brenda Boultwood for all of her excellent contributions in 2021, and look forward to Clifford's thought-provoking commentaries on topical risk management issues.

The best way for risk practitioners to navigate the uncertainties of 2022 may be to follow Robert Frost’s lead and take the road less traveled. To the dismay of risk managers, who are used to leveraging financial data and analytics for forecasting purposes, this means augmenting risk analytics with greater reliance on judgment and experience.

Over the last couple of decades, risk organizations have enhanced their analytical toolkits in extraordinary ways, with cloud computing, nontraditional data and machine-learning (ML) capabilities driving new ways of measuring and managing risk. The pandemic has, however, called into question not only the benefits of more advanced methodologies (like ML) but also the reliability of traditional risk models.

clifford-rossiClifford Rossi

In 2020, when COVID-19 first appeared on the scene, the first glimpse that standard analytical techniques would break down was seen in the models used in the medical profession to project COVID-19 cases, hospitalizations and deaths. To the detriment of effective public policy, these models were woefully lacking in historical reference points to accurately forecast COVID-19 outcomes.

More recently, policymakers’ assessment of the virus’s impact has been further confounded by the emergence of the Omicron variant, which has had major implications for financial markets and consumers. What’s more, the Federal Reserve, with its army of PhD economists and a slew of Nobel Laureates in economics, completely misread the signals on inflationary pressures in 2021, prompting the Fed chairman to publicly admit that inflation is “no longer transitory.”

Areas of uncertainty heading into 2022 abound, as they have since Covid-19 arrived. Models used, for example, to guide loan-loss reserving were severely handicapped during the pandemic’s early phase, and will likely continue to require judgmental overrides – thanks to governmental responses to omicron. The knock-on effects of widescale supply-chain disruptions and inflationary pressures will, moreover, continue to haunt markets in 2022.

Against this backdrop of Covid-19-related challenges, geopolitical unrest, inflation, and monetary and fiscal policy doubts must also factor into this year’s risk management calculus. What are the five risk areas that these uncertainties are mostly likely to impact in 2022? Let’s take a closer look:

Market/Interest Rate Risk

With most major asset classes running at lofty valuations, market risk strikes me as a major area of focus in the new year.

Financial markets should be watched closely, as volatility will play directly into your company’s market risk exposure – in the form of, say, central banks under- or over-shooting their targets, and policymakers deciding how much gas or brake to apply to fiscal and monetary policies.

Likewise, uncertainty around interest rates will factor into fixed-income investments, such as mortgages and other bond-like instruments. Interest rate forecasts built off a 40-year period of declining rates will be challenged as yields turn – but, then again, it isn’t a sure bet that the much-awaited liftoff in rates will take place, given the aforementioned market uncertainties from COVID-19.

Regulatory and Compliance Risk

Certainly, in the U.S., we’ve witnessed a sea change in regulatory and compliance activity. Regulatory agencies have been vocal about greater vigilance in overseeing the banking industry, and we should continue to see significant regulatory and compliance risk headwinds in 2022.

Amid one of the most challenging regulatory environments since the Global Financial Crisis, climate change guidance (on risk frameworks and financial disclosures) is one of the supervisory addendums we should expect to see in the U.S. banking sector in 2022. Banks will eventually need to assess the impact of long-dated greenhouse gas outputs – and associated economic outcomes from climate-risk models – on balance sheets and income statements.

Human Capital Risk

The Great Resignation of 2021 has not left the banking sector unscathed. Decades worth of institutional knowledge have been lost as a result of retirements and resignations, and many firms will therefore need to reconfigure their risk groups.

Preferences for remote working, and greater desires for work-life balance, have made this task even more difficult. As remote operations are extended due to the omicron variant, onboarding of new employees – in a manner that cultivates seamless integration and inclusion into the risk organization – will be critical.

In an elongated work-from-home environment, HR teams will not only need to manage key staff losses but also figure out how their risk teams can collaborate more closely in 2022.

Reputation Risk

Reputation risk is a perennial risk that should always be taken seriously. It doesn’t discriminate among companies – even those that are generally considered well-run. The problem is that financial institutions’ boards of directors and executive teams are so preoccupied with pandemic-driven risks (like those cited above) that they’re prone to take their eye off the ball in other important areas.

While on the surface a business may seem well-managed, it may, upon closer inspection, be fraught with bad incentives – which might be compounded by poor processes and controls. For reputational protection, it will therefore be imperative for risk managers to scrutinize fraud, cyber threats (including ransomware attacks) and employee misconduct more closely.

Credit Risk

Though it appears unlikely at the moment that credit risk will morph into a full-blown systemic risk event for the banking sector in 2022, that remains a distinct possibility – particularly if the pandemic results in further lockdowns, continued inflationary pressures, and/or supply-chain breakdowns.

Today, the global economy appears poised for continued recovery from the pandemic, but uncertainty remains in some quarters of the world. The Evergrande scandal, for example, has raised serious concerns about the property market – not just in China but across the globe. Ongoing real-estate problems could tip the scales toward economic instability, potentially increasing commercial and consumer defaults significantly.

Parting Thoughts

While many see light at the end of the tunnel from the pandemic, markets continue to teeter on a knife’s edge, with volatility remaining a key concern. A range of asset classes have, in fact, attained nearly bubble-like valuations, thanks in part to extraordinary fiscal and monetary policies that were implemented to beat back the severe economic effects from COVID-19.

What’s more, as trading of cryptocurrencies and so-called meme stocks have gained popularity, we have also seen glimpses of heightened risk-on strategies (where investor optimism jacks up the prices of riskier assets) – both at the institutional and individual levels.

Does all this this mean we are destined to experience a severe downturn in 2022, or will we see a continued recovery? We just don’t know, as we don’t have solid data to accurately determine how this scene plays out.

This will be the year of enterprise risk and uncertainty management. So, as risk managers begin to set their risk agendas for 2022, they would be wise to consider taking the road less traveled.

The limitations of traditional financial data and models in pandemic times must be considered. Navigating shoals of uncertainty will require leaning on a set of skills (like judgment and experience) that risk managers have not always comfortable with, but will need more than ever in 2022.


Clifford Rossi (PhD) is a Professor-of-the-Practice and Executive-in-Residence at the Robert H. Smith School of Business, University of Maryland. Before joining academia, he spent 25-plus years in the financial sector, as both a C-level risk executive at several top financial institutions and a federal-banking regulator. He is the former managing director and CRO of Citigroup’s Consumer Lending Group.

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