The Current Account: The Latest Headlines From Across The Banking Sector - November

Welcome to the latest edition of The Current Account! This month's headlines look at the concerns banks and financial services firms have around cybersecurity, and the technology they’re using to mitigate it, along with the persisting impact of the Bank of England’s interest rate hikes in the current inflationary environment.

Cybersecurity Concerns and the Technology Banks are using to Mitigate them.

• The Bank of England revealed that cybersecurity is the current top concern of most UK Banks and Financial institutions. In the BoE’s recent Systemic Risk Survey the risk of a cyber-attack was the most cited, with the highest proportion of respondents citing cyber risk ever recorded in the survey.

• Increasingly, banks are caught in the cross-hairs of cybersecurity attacks: according to a study by Sophos the rate of ransomware attacks in financial services continues to rise, up from 55% in 2022 to 64% in 2023.
• Michael Barr of the Federal Reserve warns that banks face an AI ‘arms race’ in the battle against cybersecurity threats, with those using AI to attack, racing against those using it to block threats. He urged banks to invest in developing AI technology to help protect themselves, not only today but in the near future. 
• Whilst there are concerns AI could be used to worsen cyber threats, generative AI can also be used to predict cyber threat scenarios, providing real-time defensive strategies, and both AI and machine learning can be used to mitigate threats.
• Some financial organisations are even using blockchain to enhance their cyber resiliency. Blockchain has consensus mechanisms that make it an ideal tool for preventing an attack on financial systems as all parts of the blockchain must have consensus to execute a command. 

PEN Point of View:

The threat that banks and financial institutions face from cyber attacks cannot be underestimated, however it seems as though both banks and government bodies have a good awareness of this. Evolving technology, such as AI, as well as rising geopolitical tensions cause the likelihood and potential damage of such attacks to increase significantly. Technology has the potential to mitigate these issues, with AI making likely attacks easier to predict and spot, machine learning helping systems cope with changes in the regulatory environment, and blockchain providing an added layer of protection for financial systems. Therefore, financial institutions who innovate in these spaces face a far lower risk of getting left behind in the arms race against cyber criminals.

The persisting impact of the Bank of England’s interest rate hikes in the current inflationary environment.

• Interest rates have levelled off as new economic data suggests the BoE’s rate rises have caused a slowdown in demand. The BoE has taken the decision not to continue its cycle of rate hikes after 14 previous consecutive increases.
• However, economists have warned that the UK is ‘skirting with’ recession as the interest rate hikes cause a slowdown in the private sector for the 3rd straight month. The latest CPI figures confirm that inflationary pressures are also not going away any time soon, but many businesses remain optimistic inflation heads in the right direction.
• There are also preliminary signs the UK’s job market is weakening, with businesses hiring less as the impact of rising prices and higher interest rates starts to bite. As unemployment bites, white collar jobs could be hardest hit, with recruiters expecting the jobs downturn to last well into next year. 
• Lloyds Banking Group released its trading statement revealing that, like many high street banks, it made bumper profits as it continues to benefit from higher interest rates. Under the new consumer duty rules brought in by the FCA, banks must now justify offering low savings rates during times when borrowing rates have risen sharply. It also predicts a drop in house prices until 2025 due to the pressures caused by high interest rates.
  
• Despite high interest rates, UK savers are still losing out to inflation. Soaring prices have seen the value of British nest eggs depreciate by £69bn between January and late September 2023, more than twice as much as the £32bn earned in interest in the same period. Investors in global equities have enjoyed returns six times larger than cash in 2023 so far, beating inflation comfortably, however many UK savers are unaware of the benefits of investments against cash savings in an inflationary environment. 

PEN Point of View:

The impact of the BoE’s 14 consecutive base rate hikes is starting to make itself felt in the economy, just as the rate hikes appear to be levelling off.  Despite the current environment of high inflation with high interest rates, the UK economy has, until now, held relatively steady without recession or a crash in the jobs market – however that could be set to change. With the impact of consumer duty, high street banks will find themselves having to justify offering low savings rates during periods of high borrowing, as the FCA addresses concerns they could profit whilst their customers suffer. Notwithstanding higher interest rates UK savers are still losing out to inflation, with many unaware of how much more powerful investing can be than cash savings during a high inflationary period. Financial institutions should consider how to raise awareness amongst their customers of how to adapt their banking habits to an inflationary environment. 

In Case You Missed It:

• Progress in AI fuels progress in CX: New research reveals Banks and Credit Unions That Have Made Progress in Using AI are Two Times as Likely to Deliver Superior CX.

• Metro Bank secures a £925m rescue deal – as part of the deal it will have to slash an estimated £30m of costs. It is also planning to sell off about 40% – or £3bn – of its mortgages to reduce the risks on its balance sheet by the end of the year.
• The cap on banker’s bonuses will be abolished from this month onwards, due to City executives complaints that the cap was a barrier to recruiting and retaining quality workers, and London was losing out on talented staff as a result. The head of the LSE stated the alternative was risking talent becoming one of the city’s biggest exports.