Europe’s Eastern Rebels Expose Next Fault Line for EU Leaders

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Bloomberg : “Europe’s Eastern Rebels Expose Next Fault Line for EU Leaders”

How is the political tension affecting the banking sector in terms of country risk and macro modelling? What is the effect on capital and liquidity management?

International press (Bloomberg, FT, Reuters etc)  has drawn attention on the tension between EU bodies – leaders (France, Germany) and the CEE EU member states over a number of issues including but not limited to:

-          Refugee quotas

-          Rule of law and adherence to EU fundamental values

-          A potential plan for a multi speed EU promoted by France’s Macron

Most recently, according to press, Brussels moved judicial proceedings against Poland in relation to the country’s judicial reform and it has given notice that it will take action against a number of countries including Poland, Hungary and the Czech Republic for not following EU decision to accept a quota of refugee re-allocation from other EU member states. In addition to this, earlier this year, EU has criticized Romania for promoting legislation that could be interpreted as an obstacle to previous efforts to fight corruption, while Brussels has also been very critical of Sofia in its effort to battle corruption.

EU  has been floating the idea of linking the distribution of EU cohesion funds to “good standing” in relation to Brussel’s guidance and EU’s fundamental values. CEE is the largest net recipient of such funds, therefore withdrawing such liquidity from the market may result in significant economic slowdown.

But how is the political crisis affecting Country Risk and what are the implications for internal risk management?

Country Risk comprises primarily of:

-          Sovereign Default Risk

-          Domestic Macroeconomic Risk

Banks can easily access Sovereign Default Risk ratings both short term and long term. However, Domestic Macroeconomic Risk is very hard to assess and even harder to tailor external ratings to the specificities of the portfolio of each bank.

How is the shift in Domestic Macroeconomic Risk reflected in your IFRS9 transformation plan?

IFRS9 promotes a forward looking approach in terms of expected losses, whereas quantitative modelling on a macro level is key. Incorporating country risk and the effect of such on macro parameters will be key and scrutinized by both national and supranational regulators

How is the shift in country risk affecting capital and liquidity management including Pillar II regulatory reporting?

A shift in the risk profile of the bank may have direct and indirect effect on capital and liquidity management both in terms of financial and non-financial risk elements. Other regulatory reports affected and need to be adjusted include ICAAP, ILAAP, Recovery plan and Risk Appetite Framework

Please feel free to request a free workshop with our team to explore the potential effect of a country risk shift on your operations

*Source: bloomberg

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