The COVID-19 pandemic has impacted overall economic activities across the globe. It has unprecedented threats in risk management across the banking & financial industries which are managing by expert risk professionals worldwide. The world’s economy is in recession and this overall pandemic situation is being worse than the financial crisis in 2008.

COVID-19 already has an impact in almost each area including enterprise risk, compliance, supply chains, contingency planning, operational controls, credit risk, market risk, stress-testing, data protection, cyber security, market volatility & digital transformation. This pandemic has affected overall valuations of assets, income & spend of firms/individuals & profitability of corporate significantly. Customer satisfaction & their expectations have put massive pressure on risk managers. The banking industry will need a significant change in the processes, policy, systems and models for risk measurement, capital buffers, loss estimation and stress testing.

Second wave of pandemic, unplanned lock-down, decrease in the income & global recession has adversely affected revenues, incomes, profits, tax collection, spend, flow of capital and demand for financial and other assets of individuals, corporate & governments. The worst impact of the lock-down is loss of income of individuals and rising unemployment across the globe. Businesses with high operational and financial leverage are getting hugely impacted.

Existing risk management practices at banks are entering into new era and banks would need to redesign risk measurement metrics, processes, operational frameworks, policies and technologies. This will involve a major transformation of risk technologies & operational processes. This is also an opportunity to implement multiple solutions at a time, implementation of cloud & new technologies including AI, and use of model implementation technology across industry. Banks need to consider the possibility of automation and implementation of target-operating models for risk management.

Risk professionals can support their organization by using their skills & expertise in immediate crisis management, operational & financial disruption by taking action in priority areas. Significant key challenging areas are Credit Risk, Liquidity & Treasury risk, Market risk, Enterprises risk & overall capital management, Compliance, Operational resilience, Recovery & resolution planning. As the economic impact is so severe the main consideration is how we would be moving forward by mitigating potential risks to achieve the targeted profitability.

Credit Risk

As this pandemic has created a severe stress situation therefore it’s been difficult to measure credit risk with 100 % accuracy. Now it might be difficult for banks to forecast economic conditions correctly & these will result in to major chunk of portfolio losses in near future. Up to some extent, regulators have tried to avoid the downward push by offering payment holidays.

In overall credit risk management, banks need to consider new scenarios for severe stress event & reassess the efficiency of stress testing models & ICAAP. Credit scoring and rating models are need to be recalibrated with different recovery scenarios. Collateral valuation methodology needs to be revised & modification is needed in early warning signs for financial covenants.

Market Risk

Market risk is another significant area to consider in these challenging economic conditions & considering market volatility. Foreign exchange, interest rates and commodity hedging considerations may be put on hold in this environment as the focus is on short term cash liquidity and funding requirements.

Market risk management teams need to make significant changes in liquidity risk and market risk models and regulatory reporting. Exceptional market volatility in the recent period led to a high level of Value-at-Risk (VAR) back-testing breaches across the industry. In the short term the key challenge is how companies will approach & formulate their risk management decisions to get rid of pandemic crisis.

Operational Resilience

From operational resilience point of view, there have been unforeseen circumstances in past two years like travel restrictions, mobility of employees, health & safety issues, inappropriate contingency plans & business disruption.  

Risk professionals need to ensure that all their operational exercises have the necessary risk controls in place, looking closely at the processes in detail, risk identification process has been strengthened & documentation is up to date. Risk Managers need to reassess all the assumptions as well, there may be some of assumptions which are no longer valid or can have adverse impact considering current pandemic environment.

As employees are working from home, they are out of office most of the time, this resulting several risks for risk professionals including employee conduct, performance issues, cyber risk, data protection, customer expectation etc.

Cyber Risk-

Post Covid pandemic cyber risk has significantly increased & the key challenge is, up to some extent it is uncontrollable. Reassessment of cyber risk is on the top most priority of the banks to stop the hacking & to control the breach of security walls. For risk professionals it is difficult to control the phishing attacks due to different jurisdiction and geographical locations. There is a tremendous increase in online fraud activities, multiple scams & financial crimes. Bank needs to set up a wider collaboration platform in the industry with the key personnel to share their expertise to find out a pragmatic approach to monitor cyber risk management closely. Three lines of defence model needs to be strengthened with more accountability at each level. Top management CRO’s, CFO’s, CTO’s, MLRO, COO’s and all other risk professionals need to benchmark the current industry practice to assess the real impact of pandemic.

Data protection, data management, data strategy should be an integral part of operational risk resilience framework. Fintech & digital transformation have been the key area of discussions prior to pandemic. It has been on the top priority agenda’s for CTO’s & top management personnel. Now industry needs to address key issues around new regulations, best practices, policy, and exemption for digital transformation. Bank needs to establish a strong risk framework around money laundering, financial crime & fraud risk management, robotics & AI platforms to assess all potential risk factors.