Navigating the Era of Exponential Risk: Key Insights from Hanna Sundqvist’s Presentation at The Banking 50’s European Digital Finance Conference

On February 20, 2025, Hanna Sundqvist, Head of Growth and Analytics for Europe & Africa at Moody’s, delivered a thought-provoking presentation titled Navigating the Era of Exponential Risk at The Banking 50’s European Digital Finance Conference in Amsterdam. Sundqvist, a leading expert in predictive analytics and financial risk management, shared her insights on the evolving challenges and opportunities facing the European banking sector amidst macroeconomic shifts, geopolitical tensions, and technological advancements.

Global Macroeconomic Challenges and Geopolitical Risks

Sundqvist began her presentation by analyzing the global macroeconomic landscape, highlighting the complex interplay of trade restrictions, geopolitical conflicts, and volatile economies. She underscored the risks posed by long-term geo-economic fragmentation, where global markets could split along geopolitical lines, exacerbating trade and currency conflicts. For banks operating in this uncertain environment, effective risk management remains paramount.

Key regions such as Europe, the Middle East, and Africa face heightened uncertainty due to factors like U.S. financing of Ukraine and escalating tensions in the South China Sea. Sundqvist emphasized that navigating these dynamics requires resilience and adaptability from financial institutions.

Optimistic Forecasts for European Banking

Despite these challenges, Moody’s Ratings projects stabilization for the European banking sector in 2025, transitioning from a negative to stable outlook. Sundqvist attributed this optimism to anticipated economic growth and monetary policy easing across G60 countries. She highlighted several key trends shaping the sector:

• Economic Growth: Europe’s GDP is expected to grow by 1.2% in 2025, with Southern Europe leading the recovery, supported by the EU’s NextGen recovery fund.
• Non-Performing Loans (NPLs): While NPL ratios remain historically low, vulnerabilities persist in sectors like commercial real estate (CRE) and small and medium-sized enterprises (SMEs).
• Interest Rates and Profitability: Lower interest rates are compressing net interest margins in markets reliant on floating-rate loans. However, banks are diversifying revenue streams and leveraging hedging strategies to maintain profitability.
• Capital Confidence: Strong capital buffers are enabling banks to repurchase shares and distribute dividends, reflecting confidence in their financial stability.

Resilience of Ukraine’s Banking Sector

Sundqvist also addressed Ukraine’s banking sector amidst ongoing conflict. Despite significant challenges, Ukrainian banks have demonstrated remarkable resilience:

• The economy rebounded by 5.3% in 2023 after contracting nearly 30% in 2022.
• Corporate loans grew by 11% in 2024 due to targeted initiatives in defense, agriculture, and energy.
• Although NPL ratios remain high at 32%, provisions cover 80% of legacy NPLs.
• Risks persist due to reliance on sovereign debt (28% of balance sheets) and currency exposure (26% of net loans).

Sundqvist stressed that Ukraine’s banking future hinges on sustained international support, prudent policy decisions, and geopolitical stability.

Artificial Intelligence: A Game-Changer for Banking

Artificial intelligence (AI) emerged as a central theme in Sundqvist’s presentation. She highlighted its transformative potential across credit risk assessment, fraud detection, customer service enhancement, and operational optimization. However, she cautioned that AI also introduces vulnerabilities related to data privacy and exploitation.

The EU’s Artificial Intelligence Act was discussed as a critical regulatory framework for AI adoption in banking. Credit scoring systems are classified as high-risk under this act, requiring strict adherence to data quality standards and transparency measures. Non-compliance could result in fines of up to €15 million.

Strategic Importance of Predictive Analytics

Sundqvist concluded her presentation by emphasizing predictive risk analytics as a cornerstone of modern credit risk management. Moody’s employs over 40 quantitative models to provide insights into pre-emption signals for financial institutions. By combining company-specific default probabilities with peer group comparisons and macroeconomic scenario projections, these tools enable banks to anticipate potential credit events effectively.

A recent analysis of 2,000 European banks under baseline and adverse scenarios demonstrated the sector’s resilience despite short-term challenges.

Strategic Priorities for European Banks

To navigate exponential risks while ensuring long-term stability, Sundqvist outlined key strategic priorities for European banks:

• Enhancing risk management frameworks to address macroeconomic and geopolitical uncertainties.
• Leveraging artificial intelligence and emerging technologies for operational optimization and regulatory compliance.
• Supporting fragile economies like Ukraine through coordinated international efforts.

Hanna Sundqvist’s presentation served as a call to action for financial institutions to embrace innovation while maintaining resilience amidst an era defined by exponential risks. Her insights provide valuable guidance for navigating a rapidly changing financial landscape.