Managing credit risk during a global pandemic—key considerations and best practices

Friday, June 26, 2020 | By James Glueck, Sellside Financial Risk Specialist, SS&C Algorithmics

Managing credit risk during a global pandemic—key considerations and best practices

A long way to recovery?

Following up from the SS&C Algorithmics Webinar “Managing Credit Risk During a Global Pandemic – Key Considerations and Best Practices” held on May 20th, we wanted to share some of the interesting insights gained from our audience poll of three topics relevant to the webinar discussion.  In terms of COVID-19 recovery expectations, participants overall appeared to lean more towards conservative presumptions with respect to the expected course of the recovery, with 92%believing that a prolonged “U,” delayed “L” or broken “W” shaped recovery would ensue, with only 8%believing that a swift “V” shaped recovery would prevail. Perhaps this reflects the more sobering realities of the severe impacts the economic shutdown has had on global output and employment, and expected levels of bad debt and credit losses likely to accrue to existing bank balance sheets.

Graph shows novel coronavirus recovery expectationsDealing with growing credit losses

When asked about credit portfolio management (CPM) priorities in this unprecedented time of global economic uncertainty and risk, webinar participants indicated that expected credit loss was top-of-mind, with 43% selecting this CPM priority.  Another 32% indicated that data aggregation, reporting and information analysis was a key priority, given the current pandemic.  Rounding out the remaining CPM priorities were capital efficiency at 14% and concentration management at 11%.  From our analysis of Federal Reserve H.8 reporting data for the month of March, as the economic shutdowns were cascading across the world, we noted that US banks had extended loans to their commercial clients at growth rates not seen in 45 years as those same clients scrambled to shore up their own cash positions while also drawing down more than $150 billion from their revolving lines of credit. 

Graph shows credit portfolio management prioritiesFocus on limit and exposure management

 Finally, when asked to rank CPM tools in order of importance given the global pandemic, 63% of webinar participants listed limit and exposure management as the number one CPM tool during these challenging times. The CPM tools of economic capital measurement, concentration limit management, and regulatory capital management were ranked 2nd, 3rd and 4th, respectively.  These results are also unsurprising and consistent with the unfolding economic crisis.  With output and employment stopped, and the resulting demand and re-allocation shock, banks are bracing themselves for severe losses and write-downs, especially from clients and customers in the sectors most impacted by the shutdowns: lodging, travel, dining, retail and transportation. When the parameters and shape of a “new-normal” become evident—and there is some basis from which to accurately measure loss rates given this new paradigm—banks will be able to reset and recalibrate their loss models.  Until this time, banks are advised to very carefully and robustly manage their limits and exposures, especially to Commercial Real Estate and C&I, as well as to Consumer Loans.

Graph shows credit portfolio management toolsSS&C Algorithmics believes that—given any likely path or scenario to recovery—credit risk will lag behind the real economy impacts and remain elevated and subject to distinct phases (e.g., immediate loss phase, delayed loss phase as delayed payments become bad debts, cross-dimensional concentration risks, persistent wrong-way risk) and will therefore necessitate a flexible and extended response.  Additionally, we believe that effectively managing credit risk exposures through the crisis and into recovery will require that banks have access to a risk measurement platform that facilitates comprehensive and transparent insight into all current and likely exposures across multiple dimensions, a platform that is robust and cost-efficient, and a platform that is scalable and readily deployable.  The SS&C Algorithmics ACM offering has been providing its global base of clients with precisely the comprehensive, flexible, scalable and quickly deployable solution for managing increasing and complex credit exposures, and can do so for your institution during these extraordinary times.

Please visit our product page for more information about our ACM offering or to schedule a product demo.  In the meantime, please take care and remain safe as we work to move into our post-pandemic

Commercial Lending, Regulation

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