In our previous article ‘New Trends in Indian Banking and the Road Ahead for Risk Management, we have covered how India’s banking system is in the midst of a decisive shift driven by digital public infrastructure, AI-enabled operations, regulatory tightening, and a renewed focus on resilience and inclusion. Also the go-forward risk agenda that must integrate technology, governance, and forward-looking stress. In this article, let us discuss the future of Risk Management in banking.
Risk management in banking is undergoing a profound transformation. From the finalization of Basel III to the integration of climate risk and artificial intelligence (AI), banks face heightened supervisory expectations and greater demands on governance, resilience, and transparency. Below is an overview of the major developments shaping the risk management landscape in 2025 and beyond.
Basel III Finalization
* The “Basel III endgame” is being rolled out across jurisdictions between 2024 and 2026.
* Key changes include recalibrated risk-weighted assets (RWA), updated market risk and CVA rules, and a move to standardized approaches for operational risk.
* These adjustments are increasing capital requirements for many banks, compelling them to rethink product economics, booking models, and risk-adjusted performance management.
Credit Risk Principles 2025
* The Basel Committee’s updated credit risk management principles emphasize counterparty credit risk, concentration risk, data aggregation, and forward-looking expected credit loss (ECL) frameworks.
* Banks are expected to align with consolidated Basel terminology and strengthen governance, stress testing, and monitoring of connected counterparties.
Operational Risk Recalibration
* Standardized capital requirements based on business indicators and internal loss modifiers are replacing advanced models in many regimes.
* This shift is driving improvements in data quality, event capture, and scenario analysis, while regulators sharpen their focus on resilience and historical loss management.
Interest Rate and Market Risk Oversight
* Supervisors continue to stress-test interest rate risk in the banking book (IRRBB) and market risk models amid volatile global rate cycles.
* Internal capital adequacy processes (ICAAP) now require more rigorous scenario design and stress calibration, particularly around liquidity and valuation dynamics.
Climate Risk: Stress Testing and Disclosure
* Central banks, including the RBI, are piloting climate risk stress tests using NGFS frameworks.
* Draft disclosure standards are pushing banks toward more consistent reporting on governance, strategy, metrics, and scenario resilience—paving the way for full prudential integration.
AI, Data, and Model Governance
* Banks are deploying AI and generative AI in credit modeling, fraud detection, and compliance surveillance.
* However, regulators demand stronger controls over explainability, bias, and model governance.
* Real-time, integrated data architectures aligned with BCBS 239 are becoming critical for risk-finance-compliance transparency.
Supervisory Trends in 2025
* Regional divergences in supervisory expectations are emerging.
* Boards face greater accountability for risk appetite, remediation of supervisory findings, and model risk management.
* Slower credit growth, potential NPL upticks, and geopolitical uncertainty are reinforcing the need for robust early-warning systems and stress testing.
Strategic Readiness and Resilience
* Banks are moving toward integrated risk frameworks that connect capital, liquidity, resolution, and recovery planning with front-line decision-making.
* Cloud-enabled automation and risk technology are seen as essential to deliver real-time transparency and regulatory compliance.
What This Means for Banks
* Expect higher capital requirements, more standardized measurement, and tougher oversight of climate risk, IRRBB, and stress testing.
* Competitive advantage will increasingly depend on data mastery, AI with strong governance, and credible disclosures.
* Banks that invest early in integrated risk systems and governance will be better positioned to meet supervisory demands while sustaining growth.
✅Bottom line: Risk management is no longer just about compliance—it is about strategic readiness. Banks that balance regulatory alignment with technological innovation will be best placed to thrive in the next phase of financial stability and resilience.
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