As we deal with the near- and long-term effects of the pandemic, banks will need to re-evaluate their resiliency across all aspects of risk.
The effects of COVID-19 were so rapid, wide ranging and interconnected that banks’ liquidity, market and credit risk models could not adequately reflect them. Unemployment, for example, shot up massively almost overnight in many countries and jurisdictions when in a ‘normal’ recessionary period it climbs slowly over a longer period. Assumptions behind models therefore had to be rapidly reviewed. In many cases, banks had to make ‘free style’ assessments of their credit portfolios and apply qualitative judgments alongside their model outputs – and this will need to continue while fixes are built from the learnings of the crisis. Credit portfolios, which had to be reweighted away from challenged sectors such as airlines, leisure and corporate real estate, will continue to dynamically evolve in the aftermath of the pandemic. Lending criteria in personal markets are likely to become more stringent. However, opportunities could also arise as changes to consumer behavior create new types of credit demand.
Many risk functions across banks struggled to access sufficiently up to date and granular data in order to report ‘in the moment’ to the board and regulators. Significant amounts of data are still held in disparate databases, and information is not always consistent or comparable. Enhanced efforts will be needed to improve data availability and accessibility across the enterprise. Reporting must also become more sophisticated, moving away from static slide decks or spreadsheets to enable real-time sharing, discussion and feedback.
Advanced data analytical capabilities will be critical, including cloud-based AI and predictive modeling techniques combining internal with external data to give a truly robust view. One of the key learnings from COVID-19 is that internal data alone is not sufficient. To provide real value, data must connect to inputs from outside the bank.
Banks successfully maintained operations through the height of the COVID-19 pandemic, but some fault lines appeared. The template for offshore service center usage will come under review. Some IT systems struggled to handle a huge increase in traffic as operations (and customer transactions) moved to digital, and will need to be upgraded if a truly end-to-end environment is to be a reality. More systems may be moved to the cloud, while use of ‘low code’ systems that can easily and quickly be built on top of existing infrastructure will also proliferate. In a more digital environment, maintaining and continually updating cyber defenses will be a pre-requisite. Banks will also need to ensure that they have robust mechanisms in place for monitoring compliance and adapt their internal control mechanisms for a significant portion of their workforce working remotely. This remote environment is particularly challenging for trading environments and trader surveillance.
With the world entering a likely recessionary period, levels of credit default are sure to continue to rise at the same time as bank profitability will be challenged. Some banks can be expected to be hit by loan losses and markdowns, reducing their market capitalizations. This may present acquisition opportunities for those banks with strong risk management who preserve capital and liquidity for strategic plays.
Better data availability and quality, enhanced analytical capabilities informed by AI and machine learning, and faster reporting – these must be the hallmarks of a risk function of the future.
In a potentially worsening economic environment, credit portfolios must be actively managed on a disaggregated basis. Banks must be able to understand where not only business sectors but individual corporate clients and personal customers are in their own post-COVID-19 journeys, what their cash flow and recovery projections are, and the risks they represent. Risk functions must be integrally connected with the operational and sales sides of the bank.
Banks proved their resiliency through the height of COVID-19 – and must be able to cope with whatever the future brings. With further lockdowns - on a local or even national level - very much a possibility, operations must be able to flex between physical and virtual footprints or a hybrid of the two. In a more digital world, cyber security and the protection of customer data will become more important than ever – key issues on which a bank’s reputation could depend.
Dynamic, predictive models to better understand customers and the associated risks could also drive opportunities to create competitive advantage and growth. Corporately, strategic acquisition opportunities could also arise as the fallout from COVID-19 unfolds.
Explore how these trends are unfolding in your country using the interactive map below.