Regardless of a bank’s starting position, vigilance is required to manage asset quality. We can expect the European Central Bank to carry out ad-hoc asset quality reviews (AQRs) once this crisis draws to a close. Banks should not just be prepared for this, they should be in control long before regulators show up to their doorstep.
That is why it is important to prioritize or accelerate programs that strengthen pro-active credit management. Improving capabilities to detect and act upon signals is key, such as attaining client-level insight into their impact on the bank’s key indicators. This enables banks to take preventive measures. Standardization and uniformity are key to leveraging new technologies and reducing time between identifying and acting on certain triggers.
Banks that invest in early warning systems, forbearance effectiveness and analytical capabilities will have a head start in the post-COVID-19 world. By the same token, banks that were complacent due to past low NPL levels may be, unnecessary, caught by surprise.