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Financial and regulatory risk
The impact of the crisis on the banking sector
The COVID-19 pandemic has caused banks today to face a myriad of challenges. With the economy in lockdown for several months, the impact of the pandemic crisis on banks’ balance sheets and business models remains opaque. Nevertheless, it is clear that the identification of relevant sources of impact is key in responding to this new crisis. Banks that are responding adequately to these new challenges can be expected to come out of the current crisis ahead, and to thrive when the real economy picks up again.
Managing current challenges
The response to the COVID-19 impact requires a coordinated assessment of systems, processes and governance related to, amongst others:
- Credit strategy: e.g. adjustment of the current credit risk appetite and objectives, with direct impact on the strategic and commercial plan of the institution;
- Underwriting criteria and moratoria: e.g. simplification of the underwriting process, introduction of sensitivity analysis in the assessment of credit risk, definition of prudential treatment of moratoria and pricing adjustments;
- Early warning: e.g. assessment of the performance of the current early warning indicators and define new early warning indicators to timely detect deteriorating loans that are under COVID 19 support measures.
- NPL management: e.g. definition or review of collection strategies and tools, definitions of controls for exposures under moratoria and analysis of the impact on NPL portfolios in stress scenarios;
- Capital management: e.g. review or definition of relevant scenarios and risk models for assessing expected credit losses under IFRS 9, articulation of the management overlay and the impact on prudential capital requirements; and
- Financial and risk reporting: e.g. impact on current reporting requirements as well as ad-hoc reporting requests from the supervisor or the external auditor.
Senior management should closely follow up the progress made by the bank on each of these areas, which requires the set-up of an appropriate governance structure and internal reporting framework.
How Deloitte can help
In each of these areas, Deloitte has profound expertise in supporting clients to address these challenges. Our professional team of Belgian and European experts work closely together covering all aspects: the strategic perspective, legal aspects, risk aspects, finance aspects, and the commercial impacts. Our teams leverages on in-house developed tools, frameworks and templates.
Through our international presence and active international collaboration, Deloitte leverages on its broad benchmarking material and its frequent exchange of views with the regulator and supervisor.
Our teams offer an exhaustive overview of the overall impact of COVID-19 within the banking organisation. We provide access to international benchmark information and are closely involved in exchanging views with the regulator and supervisor.