As Covid-19 health crisis begins to subside, new report warns the banking sector faces a challenge that rivals the economic uproar of the pandemic: a new era of economic uncertainty fueled by defaults and insolvencies businesses that might scare off the quality of the scoring of their loan books.
According to the recently published Boston Consulting Group “Global Risk 2021: Building a Stronger, Healthier Bank,” the economic impacts of the pandemic include job losses, declining consumer confidence, and disruptions in supply and demand, coupled with historically low interest rates, can create challenges that will test the risk management capabilities of the banking sector.
While the report credits banks with being better prepared for the pandemic than other organizations – mainly due to regulatory reforms enacted in the wake of the wreckage of the Great Recession – the continuation and deepening of the ongoing crisis will further test their courage.
âResilience has its limits,â the report says bluntly. âAs the pandemic enters its second year, many banks will need to prepare for an increase in NPLs and the resulting impact on the balance sheet.
The report predicted the situation could become more dire for banks as pandemic-era transition policies, including a moratorium on bankruptcy filings, expire and government relief programs end. In the near future, according to the report, a new wave of corporate insolvency was temporarily frozen by federal policies in 2020.
However, Gerold Grasshoff, managing director and senior partner of the Boston Consulting Group and co-author of the report, saw this scenario in the near future as a chance for banks to better prepare to resolve and mitigate the problem before it. does not metastasize.
âInstitutions now have a real opportunity to seize the moment and ensure their own stability and resilience by strengthening their core working processes and models, solidifying their foundations and acting boldly on emerging opportunities,â he said. -he declares.
The report called on banks to create a six-step program designed to withstand the challenges they face. This agenda includes the following considerations:
Switching to active management of the credit portfolio. The report’s recommendation is to move from the traditional buy and hold strategy to “an active management mindset that broadens the focus on credit, from maximizing returns on individual loans or sub-portfolios to optimization of risk-adjusted returns across the entire credit portfolio â. This can be achieved if risk managers give credit teams visibility across the portfolio, “thus allowing a broader view can help institutions avoid excessive risk concentrations and be more responsive to market changes. .
Increase collections and training capacities. As NPL levels rise, the report called on collection units to update their loan segmentation and ledger analyzes, update their early warning systems, and realign staffing to stay on track. increased collection and training activity increase over the coming year.
Optimize balance sheet management. Low interest rates and high levels of administrative spending before the pandemic exacerbated banks’ performance during the crisis, with credit agency S&P Global reporting 236 negative rating actions on banks around the world since March 2020. The report’s recommendations focus on identifying and mitigating credit risks before they get out of hand, coordinating interest rate risk management strategies that favor long-term fixed rate items, and reviewing them. current liquidity buffers to ensure they will not weaken.
Upgrade of compliance and non-financial risk management. The report called on banks to “ensure that compliance and risk teams have a common language for tracking and discussing relevant risks” while establishing lines of defense against all potential risks ranging from cyber risks outside the bank to internal misconduct.
Accelerate digitalization and cloud adoption. The report states that “the end-to-end automation of critical risk processes, such as credit, can help institutions respond with agility to changing events.” Cloud computing has been cited as increasing agility and resilience while reducing infrastructure costs by 30%.
The report stresses that banks need to pay more attention to managing environmental, social and governance (ESG) risks. Although this issue is more urgent in European financial institutions, those across the Atlantic will need to integrate ESG into their stress tests by the first quarter of 2022 and have their first disclosures on ESG risks. by December 31, 2022. Grasshoff recommended that US banks follow their lead to further accelerate the post-pandemic recovery.
âBanks that are ahead of the curve have already integrated ESG risk management into their strategy and are now working on integrating ESG into their core banking processes and methods,â he said.