Risk management challenges in the COVID-19 environment

What it is about

Management Solutions and the Club analyze the challenges of risk management in the face of the effects and adverse scenarios of COVID-19: how the different measurement tools interact and how institutions’ risk appetite is adjusted.

The webinar reviews what is happening internationally in the regulatory context, with topics such as stress tests and risk appetite management, and new financing backed by state guarantees, such as those in Peru or Spain, with guarantees of up to 80% and 90% on credit operations that reduce the bank’s risk.

Session summary

Three partners of a consulting firm analyze the challenges the pandemic posed for risk management in financial institutions. They explain the regulators’ response (more liquidity, flexibility on capital and provisioning, statutory and bank-level moratoria, postponed stress tests) and its consequences: flagging transactions within a few weeks, telling clients with temporary problems from those with structural ones, preventing moratoria from hiding delinquency, and deciding how much to provision in an environment where charges were between two and seven times the usual. They warn that rating and early-warning models become distorted, that model-monitoring tools, more data analytics and care with reputational and conduct risk are needed.

In the second part they set out how to improve sensitivity and stress analyses: clustering the portfolio by sector, size, geography and client type to apply different strategies (support some, seize opportunities with others, act early with the most vulnerable), defining more granular scenarios that are updated frequently, and keeping scenarios consistent across stress testing, budgeting, provisioning and capital self-assessment. They present the mild, moderate and severe scenarios published by the European Central Bank according to the length of the lockdown. They close with risk appetite: metrics that breach their limits, emerging risks (cybersecurity, providers, data), indicators that stop being comparable because of the moratoria and the need to recalculate them.

Topics covered

• Response of regulators and supervisors to the pandemic
• Moratoria, refinancings and provisions: how much to provision and how to classify
• Telling temporary from structural problems in the portfolio
• Rating and early-warning models in an atypical environment
• Portfolio clustering and sensitivity analysis with more granular scenarios
• European Central Bank scenarios by length of lockdown
• Risk appetite, emerging risks and distorted indicators