Banks should strengthen their risk management capabilities and prepare for the impact of substantial loan losses in the coming months, as the completion of government aid programs reveals the financial impact of the pandemic, according to a new report from Boston Consulting Group (BCG).
The report, entitled Global Risk 2021: Building a Stronger, Healthier Bank, points out for banks the likelihood that the coming year will be marked by business defaults and insolvencies, as the effects of the pandemic are fully reflected in the financial statements of the companies.
This comes after a year in which banks' risk provisions were strengthened, ensuring greater resilience and allowing strong support for clients. US banks booked considerably more provisions for potential loan losses in 2020 than in 2019, with provisioning growth averaging 137%. European entities also increased their provisions by 113%.
However, this room for manoeuvre could be eroded as the pandemic moves into its second year. If the global economic outlook deteriorates, the impact is likely to be felt differently in each country. The BCG findings suggest that banks in countries where tourism, real estate or transport represent a greater proportion of the industrial complex will be the most affected.
Gerold Grasshoff, Managing Director and Senior Partner at BCG and co-author of the report, says that "banks have learned from the global financial crisis of 2008-2009 when it comes to capitalization, liquidity management and crisis response Today, well-positioned and resilient banks are actively identifying opportunities for consolidation and growth. However, they need to remain cautious as measures to support the economy slow down, revealing underlying lending problems. Institutions now have a real opportunity to seize the moment and ensure their own stability and resilience by reinforcing their basic processes and work models, solidifying their foundations and acting boldly in the face of new opportunities. "
Banks must adopt immediate protective measures to advance in the post-pandemic period
According to BCG's annual risk report, Global Risk 2021: Building a Stronger, Healthier Bank, banks must apply six fundamental levers to emerge from the crisis in a strengthened position:
- Update scenario planning using revised information that enables them to effectively assess operational, business, and financial vulnerabilities at the portfolio level.
- Move to active management of credit portfolios by creating a credit portfolio management unit, responsible for formulating optimisation recommendations.
- Increase charging and problem-solving capabilities while creating a supportive digital infrastructure.
- Optimise the balance sheet and income statement, working methodically to examine each central area and optimising level by level.
- Advance compliance and non-financial risk management through the formalization and standardisation of governance frameworks.
- Accelerate digitisation by emphasising cloud adoption for agility and resilience.
As banks grapple with the unstable outlook ahead, strengthening the critical capabilities that will define the next generation of leading institutions - including operational resilience, as well as environmental, social and governance (ESG) risk management - it will ensure that they have an advantage in recovery.
"The traditional banking business is immersed in a transformation process and was already facing a series of important challenges. The global economic impact of the Covid-19 crisis will put banking under additional stress due to losses from bad debts. Strategic and tactical risk management, digitization and investments in sustainability have proven to be some of the key tools to redefine the sector, enabling banks to strengthen their resilience and increase their versatility to continue offering safe products and investments to clients. "Says Jorge Colado, Managing Partner & Director of Boston Consulting Group and head of Risk & Compliance at BCG Spain.
"The most advanced banks have already integrated ESG risk management into their strategy and are now working on integrating ESG into their core banking processes and methods," said Gerold Grasshoff of BCG. "Entities that seize this opportunity will not only meet regulatory requirements, but prepare for post-crisis success."