Working apart together – a multidisciplinary approach to Covid-19 risk management for banks
Working apart together
Banks will have to manage the long-term effects of the Covid-19 crisis by working together across disciplines. Cooperation is crucial, now more than ever.
The global Covid-19 pandemic is a battle on multiple fronts for banks. As with all companies, the wellbeing of their employees is their first priority, together with assuring the continuity of daily operations. The switch to a new (remote) way of working and higher risk of absenteeism pose a direct and significant operational risk. Secondly, part of their clients face immediate financial problems, which has led to an overnight increase in expected credit losses. Banks are expected to manage their credit risk in a diligent way and hence protect the assets of their depositors, while at the same time, banks have responsibilities to society at large. As business continuity is critical, banks need to keep the financial system going in the short term. In addition, banks are expected to be lenient to companies and individuals who are under financial distress due to the crisis in order to minimize negative social and economic impact.
At this moment, companies, banks and governments are executing and updating their business continuity plans in order to sustain the crisis, knowing that unforeseen issues are everywhere. But by and large, banks appear to be well-prepared to quickly adapt to the new situation. Also, over the past days various institutions have published useful material on this topic. In this article, we will zoom in on comprehensive 'Covid-19 risk management' for banks. This requires a combined short and long term view on risk management, and a multidisciplinary task force to cover all issues that banks will be faced with.
At the moment of writing, we are still in what appears to be the early stages of the Covid-19 crisis. Therefore, we cannot provide a complete list of issues that banks face. Rather, we want to mention the areas with a high probability of being impacted, and those with large financial, operational or technical consequences.
- Account managers and client service centers, or 'the business' are facing a client base with an immediate need for liquidity support. Proper proactive communication and crisis measures – in bulk or in person – can alleviate clients' worries, improve their decision making, and improve the bank's trustworthiness. The support measures for SMEs recently announced by the large banks in the Netherlands are a good example. However, it will be a balancing act especially if the Covid-19 measures are extended for a longer period; too lenient conditions may undermine the bank's long term stability, and unclear communication can have adverse consequences.
- Special servicing / restructuring teams are managing non-performing clients, who were already vulnerable before the crisis. On an individual client level, these teams will face tough choices. At the same time, they can expect an influx of new non-performing clients, putting stress on resource capacity. At least for the short term, banks should leverage on their commercial teams to support good clients that are facing immediate liquidity issues due to the Covid-19 measures.
- ALM teams face highly volatile markets and assessing their preparedness for this crisis may be a challenge in itself.
- Economic research teams will have to balance increased divergence in future scenarios with a high need by other departments for a 'straight answer', a clear baseline scenario.
- Risk management teams may need to allocate resources to urgent tasks related to the Covid-19 crisis, while many such teams are also responsible for resource-heavy large transformation programs (TRIM remedial actions, new Definition of Default, Basel 4). At the same time, many assumptions underlying the (credit) risk models may not have been tested under these circumstances, therefore, the performance of risk models should be monitored closely.
Senior management faces severe pressure on profitability which needs to be addressed, while maintaining important transformation programs, trust from clients and the society at large, and employee/contractor/contingent workforce/supplier relations.
- 'Extraordinary times call for extraordinary measures', the saying goes. But in a highly regulated environment such as banking, creative choices may be prohibited or lead to unforeseen long term consequences. Therefore, involvement of compliance and legal teams is of paramount importance.
- Finance is responsible for providing a 'true and fair' view of expected credit losses, to be represented by an increase of IFRS 9 'Stage 2' provisions. It may prove to be difficult to determine what is true and fair at this moment. Amongst others, banks will struggle to determine their IFRS 9 macro-economic scenario which heavily impacts provision levels. On this point, regulators are expected to provide guidance (an 'anchor').
- Control and Internal Audit teams should be the guardians of maintaining a diligent process and recording any nonstandard decisions. They are well-positioned to assist other teams on dilemmas regarding maintaining high standards even in crisis situations.
The solution – breaking through the silos
At this moment no one will have definitive answers to the questions and dilemmas raised above. We know from experience, however, that today's challenge do not respect the boundaries of traditional silos in the bank. Cooperation between departments is a good market practice in all situations. In response to the Covid-19 crisis, forming a multidisciplinary task force may be key to be prepared for the insecure times ahead and to solve pressing short term issues without hampering long term stability of the bank.
Please contact Joost Lensen for any queries.
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