MANAGING CECL/IFRS 9 DURING UNEXPECTED TIMES: SIMULATION CAPABILITIES
R&C: How are banks reacting to COVID-19’s impact on the economy? What are the most significant challenges they face when it comes to managing their provisions?
Fortes: Financial institutions (FIs) had to react quickly from the beginning of the coronavirus (COVID-19) crisis. One challenge is the impact on and increase in bottom line provisions. Global banks are starting to disclose large losses and increasing provisions to record levels that will deteriorate their capital and drastically cut their profits. This will bring consequences that will prevail for a long period, forcing banks to adapt their business and rethink their strategy. There will be a lot of pressure to reinvent certain areas inside banks and to introduce innovations at higher speed. Another challenge is to understand this new reality and align it with what needs to be done to overcome all the difficulties of this unprecedented environment. Risk departments are working hard to find answers to questions raised by boards of directors, supervisors and market analysts. Everyone is seeking information almost in real time. They are looking into the data to understand the current situation and what to expect going forward, across all possible scenarios. There is also a need for more qualitative information about these provisions and a need to rely more on analytical expertise, since provisions are typically calculated on historical data with adjustment of forward-looking information. To a certain extent, there was an expectation that previous default and recovery rates were a good representation of what to expect in the future.
Oct-Dec 2020 Issue
SAS