While the COVID-19 pandemic started as a sanitary crisis, its repercussions have cascaded to the overall global economy, resulting in a multidimensional crisis. In order to avoid a systemic financial crisis, we have seen an unprecedented government intervention worldwide. As compared to the 2008 Financial Crisis, Governments have been using banks as a transmission mechanism to implement their support and relief measures.

Despite this, over the past few months, like several sectors, the banking industry has seen an escalation of different risks. There are both direct “on balance sheet” risks such as credit and liquidity risks as well as operational risks, cybersecurity and “off-balance sheet” risks. Banks have been impacted by the daily changing market conditions and worsening credit quality among others. Banks were confronted with a completely new market situation practically overnight. Existing risk analyses of credit risks, expected credit loss (“ECL”), probability of default (“PD”) and loss given default (“LGD”) calibrations were outdated abruptly.

In order to effectively manage this challenging crisis, risk management had to be at the forefront to stabilize the operational and financial disruption. Revisiting the credit risk model was essential as banks had to capture the potential loss with limited and uncertain forward-looking information. Thus, going forward, flexibility will be key. Regarding Enterprise Risk Management (“ERM”) and capital management, conducting stress-tests scenarios and updating forecasts should become part of the daily operations. Re-evaluating strategies and identifying new risks will be crucial to navigate this recession effectively.

Till date, no one can predict how this pandemic will evolve and what will be its long-term impact. The uncertainty on the recovery scenario further adds complexity to assessing a broader range of risks. Hence, Banks will need to proactively keep prepared for the post-pandemic challenges.

RAKESH SEESURN

Head of Risk