How Capital Markets turned the Coronavirus threat into an opportunity

Covid-19

During Covid, countries across the world were taking steps to ease lockdown measures that have almost brought economies to a grinding halt. Many businesses were forced to reduce operations or shut down, and an increasing number of people are losing their jobs. Companies in the service industry, a major source of growth in many economies, were among the hardest hit by the coronavirus pandemic. Manufacturers have also been hit, and world trade volume could plummet this year.

This unexpected crisis raised questions about the effectiveness and agility of banking models and existing risk management frameworks. Risk and business functions, as well as key decision makers, needed to steer their organisations through uncharted waters.

Digital Transformation


Embracing Digitalisation: A Strategic Opportunity for Banks

The health crisis could become the opportunity for financial institutions to fully embrace digitalisation, even though many banks are putting tech investments on the back burner as they focus on cutting costs. Speeding up this technological transition now, will not only help lenders meet a growing demands for digital banking services in the short term but will also create enormous value for financial institutions in a challenging environment. Adopting a structured approach can help guide institutions through this process, helping them access the opportunities that disruption can bring while keeping the transformation firmly grounded. We highly recommend that banks identify some key initiatives that can deliver material returns in 12 to 18 months. Short-term gains will help fund a deeper transformation in the long term by freeing up capital and releasing resources needed for more strategic, high-impact priorities. In doing that, risk and treasury leaders should focus on competitive advantage and value creation. In our experience, banks that concentrate upfront on a maximum of two or three use cases get the best results.

Over the years, we have developed a deep and extensive experience in Risk Management, Front Office and modelling, aware of the growing importance of the role of digital transformation as successful facilitator. We have the size and capability to address all risk issues and deliver end-to-end solutions and consultancy, both in the short term, addressing COVID-19 challenges, and in long run for a true and deep digital transformation.

  • Support on the utilisation of liquidity buffers under the LCR regime

  • Ensure that the flexibility embedded in the regulatory liquidity framework is integrated into relevant internal processes

  • Reassess the existing stress scenarios to adopt the “new reality” and ensure that scenarios can be adaptable and “on-the-fly”

  • Recalibrate existing models to perform ad-hoc analyses

  • Assess the ad-hoc data availability, flexibility of calculation engines and reporting

  • Assist on analysing expected liquidity needs from clients (differentiated at a granular level by product/customer type, currencies, etc.)

  • Support on improving governance and analysis of contingency measures

  • Define triggers, daily monitoring and detailed escalation protocols for adapting to the new context

  • Define new ad-hoc reporting with clear and timely information on key liquidity metrics and banks’ liquidity positions to capture the COVID-19 impact

Assistance with the application of COVID-19 stress scenarios and simulations of creditworthiness with our deep credit risk analytical expertise in credit ratings and stress test modelling.

Assistance in carrying out ad-hoc sensitivity analyses in order to translate the dynamic development of the economic outlook into credit risk-relevant indicators (i.e. PD, LGD, ECL).

Experienced credit professionals with know-how in the internal credit rating process to ensure the timely execution of re-ratings.

IFRS 9 impact assessments and scenario analysis to understand the impact on Stage 2 migrations and the impact on IFRS 9 scenario adjustments.

Operational support for your restructuring and workout units to relieve processing pressure and / or operational support for your front lines to relieve pressure on credit applications or credit monitoring.

Setting up a credit risk management COVID-19 task force:

  • Support establishment of a database to track credit-related regulatory and legal changes

  • Carrying out routine analytics for RWA, capital and IFRS 9 provisions

  • Supporting the implementation of new requirements into existing credit risk processes

  • Supporting day-to-day operations, project management, and credit risk MIS reporting

  • Accelerate the management of credit spread risk in the banking book if not sufficient yet

  • Provide for the impacts of interest rate and credit spread movements on accounting P&L and capital management

  • Re-allocate risk-based limits to reflect new market conditions

  • Revise stress testing scenarios and back-testing methodologies

  • Adopt methodologies for fair value adjustments to account for liquidity discounts, close-out costs (bid/offer) and higher volatilities

  • Define new scenario for scenario analysis

  • Define new methodologies for tail risk management

  • Enhance CVA / DVA / XVAS methodologies and their monitoring framework

Avantage

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Avantage Reply is a pan-European Financial Services (FS) management consulting firm, delivering change initiatives in Risk, Compliance, Finance and Operations. Avantage Reply has operations in Amsterdam, Brussels, Frankfurt, Lisbon, London, Luxembourg, Milan, Munich, Paris, Rome and Turin. Our consultants advise on and deliver pragmatic solutions, supported by comprehensively tested analytical techniques using proprietary solutions, methodologies and prototypes. Being part of the Reply Group, Avantage Reply successfully leverages on the group’s technology competencies to deliver on client engagements. More details at