Perspectives / Credit Risk And COVID
As banks are instructed to make further loan support schemes available to clients – credit, risk and portfolio managers have a lot on their minds
August 2020 – Following the initial round of government loans, and with more to follow, banks are now faced with a variety of challenges regarding managing their loan books.
- Identifying early warnings and signs of distress in the loan book. Understanding what is already committed and how it links to the borrowers’ ecosystem.
- Retrospectively examining new COVID-19 related lending. A lot of lending had to be done quickly, ignoring risk models and risk appetite, perhaps even undergoing a lighter-touch ‘Know Your Client’ process. All work that was done quickly, will need to be re-visited. Some banks lent many multiples more than they would annually in the space of three months; this loan ‘hump’ will also present portfolio management challenges, as the portfolio requires day-to-day oversight and annual renewals.
- Understanding second-order risk. When a major client gets into trouble, it is absolutely critical that the bank can quickly understand (or ideally already know) what the impact will be not just on the lending that they have provided to the company now in trouble, but the entire supply chain, across their lending portfolio.
- Deep diving on specific ‘at risk’ sectors specifically those hardest hit by the COVID-19 pandemic. For example; transportation, food and beverage. Industry and sector code analysis will become key.
- Detecting Fraud in the loan book
- Reviewing the loan book from a country risk perspective. Some of the EU economies, such as France, Italy, Spain & The UK were seriously impacted by COVID-19 (UK GDP fell by more than 20% in Q1 2020). Understanding country risk and exposure when looking at the loan book will be important when prioritising the portfolio reviews. The risk of contagion remains high, although recently mitigated with the agreement to pump €750 billion of funding into the European economies.
- Reviewing the loan book from an ESG perspective and aligning with the ECB regulations and guidelines (mentioned earlier in this paper).
- Ensuring that they have accurate data and the right technology in place to undertake these review activities quickly and accurately.