Banking Resilience in 2025 and Beyond

by Ekmel Çilingir
Chairman of the European Merchant Bank

 

The new year is fast approaching, and banks are no exception to feeling its jitters. Throughout this year, I have shared my points of view on the most relevant banking topics on LinkedIn Pulse and on EMBank’s blog. I hope you have enjoyed them and found them useful. Looking back, the common theme in my articles has been how to boost resilience and make the best of what transformations 2024 had in store for the sector. In this article, I aim to distil them in a resilient frame of mind and update you on the notable developments while looking forward to 2025.

 

The Path to Resilience:

1. Renovate our risk models to grapple with ‘radical uncertainty’
2. Right size and seek profitable growth amidst the ‘regulation storm.’
3. Reform outdated IT strategically and reduce complexity
4. Liquidity Watch: Health of our loan portfolios, competition for deposits
5. Introduce new services & revenue streams
6. Form partnerships with and also compete effectively with fintechs

 

Managing Risk Better, Right-Sizing for Profitable Growth

We discussed the capital requirements of CRD6 at length. We underscored the need for a more real-time, multi-scenario modelling approach, as the single-parameter models from the previous era cannot cope with the risk assessment needs of today. Case in point:

Deregulation and tax cuts expected in the US would form a stark contrast with Europe’s stricter oversight + low-interest-rate setting, giving US banks a competitive advantage in growing their loan volume and slowing EU bank’s recent win-backs (those banks with substantial U.S. operations, such as Barclays, Deutsche Bank, and UBS, should see positive impacts). Tariff walls looming may weaken growth and trade, therefore, banks’ loan health. Policy moves shadowing the Federal Reserve’s independence is the third issue watched closely, as it could bring even more volatility or douse anti-inflationary efforts.

European institutions are increasingly lobbying for regulatory relief at their end. Discussions between finance ministers may result in counter-efforts to maintain competitive balance. We have seen a lot of European banking M&A activity in 2024, which may increase to strengthen regional positions. Competitiveness and increased productivity rely even more on fostering new solutions for a new generation with new tech.

 

Reforming for “Fighting Fit”

DORA (Digital Operational Resilience Act) is coming into force on January 17, 2025. Banks and technology providers are currently at about a “6 or 7 out of 10” level of preparedness in terms of compliance readiness. While progress has been made, significant work remains to achieve full compliance by this deadline.

We can group the sector’s response to DORA into 3:

• Strategic leaders are the most proactive institutions, using DORA as a chance to overhaul their entire risk and compliance programs.
• Tactical responders implement targeted changes only in areas with known gaps, such as third-party risk management.
• Reactive banks are choosing to wait and see, viewing DORA as a hindrance to innovation and attempting to minimise current spending.

Whichever they are, EU banks are all challenged by DORA (to quote Deutsche Bundesbank’s head, DORA’s primary objective is to “bring consistent rules and oversight to the seemingly boundless sky beyond the clouds.”). Banks’ most significant concerns?

• New requirements for third-party risk assessments and technology vendor oversight
• Increased accountability for disruptions caused by third-party providers
• The need to review and amend contracts with technology service providers
• Requirements for comprehensive ICT risk management and resilience testing

DORA’s opportunity for banks lies in strategically restructuring tech with vendors now so as to move lighter and as secure as ever into the future. Improving cybersecurity spending efficiency by just 5% a year could boost banks’ bottom lines. IT impacts core banking functions as well as risk management and innovativeness, so treating DORA only as a compliance exercise could result in higher costs and operational risks going forward.

 

Capital, Liquidity and Loan Portfolios Health

Surveys indicate that the banking sector took significant steps for resilience in 2024 with sound capital, liquidity, and asset quality metrics. Several critical initiatives implemented in 2024 are:

• 74% of banks enhanced their risk measurement and stress testing capabilities
• Banks reduced excess capital accumulated in previous years through share buybacks and redemption of preferred shares to improve return on equity.
• Treasuries expanded their responsibilities, with 89% managing balance sheets (up from 63%) and 71% handling liquidity management (up from 53%).

Banks implemented several structural changes to strengthen their risk frameworks, with an increased focus on credit risk transfers (CRT) and forward-flow arrangements to reduce risk-weighted assets. 42% of institutions modified their operating models to improve accountability across the first and second lines of defence. 41% enhanced their risk data aggregation and reporting capabilities. Chief Risk Officers identified key focus areas:

• 33% prioritised liquidity risk management for 2024, more than twice vs 2023
• 86% implemented stricter lending standards
• Cyber risk monitoring was enhanced. Data security was the highest-ranked operational risk priority.

CRD6 came into force on July 9, 2024, to be implemented by January 2026. This year, banking showed a net shift toward more sophisticated risk management, emphasising liquidity monitoring and capital optimisation in order to meet it. One note: The EU’s instant payments regulation will require European banks to offer real-time payments to their clients. This will impact how Treasury departments manage the bank’s liquidity position. Intraday liquidity metrics will matter more; the parameters for liquidity stress scenarios may change.

 

New Services & Revenue Streams, Effective Partnerships

AI, machine learning and general LLM usage have already transformed many areas, including banking. In 2025, this trend is expected to go beyond creating internal efficiencies with fintechs offering customer-facing AI services more: In 2025, Revolut plans to slowly roll out a new AI-powered assistant that will “adapt to customers’ needs and preferences in-app, guiding them towards smarter money habits, enhanced financial decision-making and streamlined admin.”

Legacy banks must keep pace yet express even better the value of human relationships their clients feel these days. In my view, there must be a rational limit to the hyper-personalisation of services: ‘What is the actual premise and true benefit of each innovation for this customer(s)?’ is a question we must regularly ask and answer quickly in practical ways to reach underserved masses better.

The rise of new technologies—notably generative AI—could help banks automate and speed up the real-time treasury model, but it could also make such a transition more difficult. Already, supervisors suspect any kind of technological “black box” that withstands analysis and oversight. Banks, therefore, need to build robust models that they can explain internally and to supervisors.

Bank-fintech partnerships are becoming more strategic and focused on specific use cases. From BBVA to Santander, we heard more news this year of legacy banks partnering up with and importing talent from fintechs for instant payment solutions in the Eurozone or opening up to users in rising star regions of Latin America, India, and Southeast Asia. As fintech matures, investors and established banks are more selective in teaming up with fintechs that have proven their value proposition. This goes parallel to increased M&A activity in fintech. With heightened scrutiny from regulators, fintechs would do well to partner up with legacy banks to overcome their compliance and scalability challenges.

 

Conclusion

As 2024 started, we had already come a long way and demonstrated many instances of resilience to shocks or market waves. Developments show that European banks have tread the path to resilience fairly successfully this year. Throughout 2024, I have shared with you examples of the banking industry, including our own EMBank, taking quite significant steps into the future. We will keep our resolutions in clear sight and carry a resilient attitude as 2025 unfolds. I wish you a healthy, peaceful and prosperous new year.

 

Sources:

1. https://www2.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-outlooks/banking-industry-outlook.html
2. https://assets.ey.com/content/dam/ey-sites/ey-com/pl_pl/article/ey-iif-bank-risk-management-survey.pdf
3. https://www.bcg.com/publications/2024/bcg-treasury-benchmarking-survey-fortifying-the-balance-sheet
4. https://www.centrl.ai/resources/understanding-the-impact-of-the-dora-act-on-third-party-risk-assessments-for-banks-in-the-eu/
5. https://www.digital-operational-resilience-act.com
6. https://www.bain.com/insights/the-eus-dora-a-gateway-for-banks-to-strengthen-operational-resilience/
7. https://www.cnbc.com/2024/08/08/what-is-the-eus-digital-operational-resilience-act-dora-explained.html
8. https://www.business-standard.com/world-news/european-banking-industry-braces-for-tougher-competition-under-trump-2-0-124110801765_1.html