With 2024 behind us, we now turn our attention to the risks that 2025 brings for financial institutions. In 2025, the industry will face a shifting regulatory environment, increased geopolitical tensions, rapid technological adoption and potential consolidation. While this backdrop may seem familiar, the dynamic landscape of 2025 will present a unique mix of optimism and challenges. In this article, we explore the top five risks facing financial institutions in 2025.
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01
Regulatory shift: Navigating deregulation in the United States
2025 began with a new U.S. administration and news that the Canadian Prime Minister would resign. With Republicans controlling the presidency and both houses of Congress, significant changes in leadership, legislation and regulation are expected, leading some to call 2025 the Year of the Regulatory Shift. The administration’s aggressive deregulation campaign, including the “10-for-1 Order” to get rid of ten existing regulations for every new one is part of a broader agenda involving downsizing and restructuring agencies.
Benefits of reduced regulation
- More favorable business climate: Reduced compliance costs can lead to market expansion, enhanced competitiveness, increased lending and improved profitability.
- Rollback of recent rules and policies: Potential reversals on executive orders including AI, the SEC’s climate risk disclosure, the DOL Fiduciary Rule and final CRA regulations.
- Reconsideration of capital requirements: Proposed increased capital requirements for banks, such as those under Basel III Endgame, may be reconsidered.
- Accelerated consolidation: A more favorable regulatory outlook on mergers may accelerate consolidation within the industry.
- Increased tech-forward innovation: Support for AI, crypto, digital assets and fintech partnerships can drive innovation.
While deregulation creates excitement and opportunities, it also brings uncertainty, requiring financial institutions to be adaptable and vigilant in a dynamic regulatory environment. This may be the biggest area of change in 2025 and intersects with each of the other risk themes, but time will tell how things develop.
Key risks of deregulation
- Uncertain regulatory landscape: Unclear priorities and evolving rules create compliance challenges. Financial institutions must stay compliant with a changing regulatory framework.
- Increased financial risk-taking: With fewer regulatory constraints, there is potential for increased financial risk-taking, which could lead to financial instability.
- Higher incidence of fraud and financial crime: Reduced oversight may result in a higher incidence of fraud and financial crime.
- Erosion of consumer trust: Weaker consumer protections can erode trust from customers and lead to increased consumer litigation.
- Reputational damage: Lapses in ethical standards and consumer protections can harm reputations.
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Cybersecurity: Confronting sophisticated threats
Cybersecurity remains a top risk and priority for financial institutions. It ranks as the second highest emerging risk today, according to the WTW Emerging and Interconnected Risk Survey, following AI as the top emerging risk. We may see cyber enforcement actions dialed back with the new administration, but organizations must remain diligent in cyber risk management.
As financial institutions embrace digital transformation, they face an escalating range of cybersecurity threats. Cybercriminals are employing increasingly sophisticated tactics to breach financial systems, posing significant risks to the industry.
Key threats
- Advanced Persistent Threats (APTs): Prolonged, targeted cyberattacks designed to steal sensitive data or disrupt operations. AI and machine learning are being used to exploit vulnerabilities. Financial institutions must continue to invest in security tools capable of real-time threat detection and response.
- Ransomware attacks: High-profile targets, including financial institutions, face persistent ransomware threats. Robust backup strategies, data encryption and endpoint protection are essential.
- Nation-state affiliated cyber activity: Geopolitical objectives drive attacks on critical infrastructure and financial sectors.
- Supply chain and vendor vulnerabilities: Reliance on vendors introduces risks. With a growing reliance on third-party platforms, financial institutions are outsourcing more functions and services. Key third-party risks include operational, cybersecurity, compliance and legal risks. Risk assessments and effective oversight of third and fourth-party vendors are imperative to managing the overall risk profile.
Cyber risks associated with the above threats include data breaches, financial fraud, legal risk, operational disruption and reputational damage.
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New technology: Embracing innovation with caution
The rapid adoption and expanded use of technologies like generative AI (AI), machine learning (ML), fintech partnerships, cloud computing and quantum computing are transforming the financial institutions industry. While these innovations offer growth and efficiency opportunities, they also introduce significant risks and setbacks that must be carefully managed.
Key risks
- Third-party dependencies: Reliance on third-party vendors introduces risks such as vulnerabilities, data breaches and service disruptions. Effective risk management is essential.
- Algorithmic bias and transparency: AI and ML can raise concerns about bias and transparency. Organizations must ensure their AI systems are fair and provide clear, explainable outcomes.
- Cybersecurity concerns: New technologies increase vulnerability to cyberattacks. Cybersecurity and technology, and Cyber and AI, are highly interconnected risks. Comprehensive cybersecurity measures, including real-time threat detection and robust encryption, are crucial.
- Regulatory compliance: Navigating the regulatory landscape is challenging, even with the new administration’s deregulatory approach to AI. Financial institutions must ensure compliance with relevant laws and regulations, both at the federal and state levels.
- Human factor: Successful adoption of new technologies depends on employee understanding and effective use. Training and development programs are vital.
By taking a cautious and strategic approach, financial institutions can harness the benefits of new technologies while mitigating the associated risks.
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Economic uncertainty: Adapting to known challenges and emerging trends
Economic uncertainty remains a significant risk for financial institutions in 2025, driven by factors such as fluctuating interest rates, inflation, tariffs and global instability. Institutions must adopt proactive risk management strategies, including stress testing, scenario analysis and revenue diversification. Staying informed about macroeconomic trends and maintaining flexibility are key to navigating volatility.
Key challenges and risks
- Interest rate uncertainty: The Fed paused rate cuts in January 2025, emphasizing the need for inflation to decrease. Stable rates provide predictability, but organizations must manage interest rate risk prudently. Higher interest rates make borrowing more expensive, increase the risk of defaults and have led to the “extend and pretend” strategy for loan modifications. There are signs that the strategy may be nearing its limits, with lenders starting to foreclose on more distressed assets.
- Inflationary pressures: Persistent inflation challenges operational costs and consumer behavior, eroding purchasing power and reducing spending. Organizations must adjust pricing strategies and product offerings to remain competitive and manage increased capital costs.
- Greater use of tariffs: Tariffs raise production costs for businesses, increasing loan demand but also the risk of defaults due to reduced profit margins. Tariffs can cause market volatility, affecting investment portfolios.
- Global economic instability: Trade disruptions and slower recoveries in other regions impact North American financial institutions. U.S.-China trade tensions affect cross-border transactions and investment flows. Diversifying portfolios and strengthening international partnerships are essential.
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Geopolitical tensions: Operating in turbulent times
Geopolitical tensions pose substantial risks to financial institutions, impacting global trade, investment and market stability.
Key risks
- Market volatility: Conflicts and trade disputes cause market fluctuations, affecting asset prices and investment portfolios.
- Credit risk: Instability increases loan default rates, especially in affected regions.
- Operational disruptions: Supply chain and economic disruptions strain international operations.
- Regulatory challenges: Complex sanctions compliance and regulatory changes impact operations and profitability.
- Cybersecurity threats: Heightened tensions increase the risk of cyberattacks from state actors.
To manage these risks, financial institutions can adopt several strategies including scenario analysis assessing the impact of events on financial stability; robust compliance and risk management to address regulatory changes and ensure compliance; crisis management plans to ensure business continuity; and geographic diversification of investments and operations.
Continue to stay ready in 2025
In 2025, financial institutions face a complex and dynamic risk landscape, marked by transition and uncertainty. By understanding and addressing the top risks of regulatory shifts, cybersecurity, new technology, economic uncertainty and geopolitical tensions, organizations can enhance their resilience and adaptability. Proactive risk management, continuous monitoring and strategic planning are essential to navigate these challenges. Organizations that remain vigilant and flexible will be better positioned to seize opportunities and maintain stability amid uncertainty.
Insurance and risk financing solutions, along with advanced analytics, are crucial components of a robust risk management strategy. In the evolving landscape of 2025, it is critical to conduct thorough risk profile assessments and coverage gap analyses, identify new exposures, review the breadth and interconnectedness of insurance programs and evaluate insurance limits to safeguard financial resilience.
For more information on how to manage your organization’s risks in 2025, reach out to a WTW colleague or contact us here.
Disclaimer
WTW hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
