Surprises are fun but not when you are in risk management. The COVID-19 pandemic has left the financial sector in shock and panic as with the dominating reaction in the 2008 global financial crisis. The economic crisis brought about by the pandemic got organizations questioning their risk management strategies. Two years into the pandemic, have you evaluated if your organization is pandemic-ready?
The banking industry has always been reliant on traditional risk management practices that are more reactive than preventive, writes Ajay Katara, a consultant in banking risk management at Tata Consultancy Services, in a 2020 risk management article. He added that organizations will need to have to shift to a more proactive risk management strategy that is guided by strong board leadership. This strategy includes active threat surveillance, dynamic response mechanisms, and business continuity plans.
Events like the global pandemic remind us to refocus on non-financial risks, such as cybersecurity, vendor risks, and conduct risk. Financial risk managers do not necessarily focus on these risks but unexpected events force managers to have a more integrated response to such.
The third approach that needs to be applied in light of the pandemic is an enterprise-wide risk management (ERM) approach. ERM extends traditional risk management practices, which are departmentalized and narrow, by providing an integrated and holistic perspective to strategic decision-making. Successful ERM will help an organization be more flexible and achieve more business opportunities even beyond the problems of the COVID-19 pandemic.
Climate change continues to get everyone’s attention as the pandemic could have been an effect of this phenomenon. Scientists have been talking about the possible reactivation of ancient viruses preserved in glaciers being melted by rising global temperatures. Such a phenomenon could put us in another pandemic much worse than what we currently witness. Thus, organizations should give attention to climate risk management in a more serious way. Organizations started focusing on climate risk during the 2015 Paris agreement, but the action towards its fruition have been very limited. Never too late, businesses must start and work together to minimize carbon emission and other mitigating actions to manage climate risk effectively.
Foreseeing the future is a powerful tool for businesses, and they can almost achieve this through robust risk modeling. Existing risk models must be recalibrated for better estimation of risk parameters. Under the consequences of the pandemic, credit models have lost their predictive capabilities due to the uniqueness of the current crisis. It was also hard to quantify the losses. A more robust methodology in risk modeling could be made through the joint effort from banks and regulatory bodies. One example is artificial intelligence (AI), a topic covered in a previous CMAP post.
Lastly, a long-term solution would be stronger stress test scenarios that must be done by banks to design more resilient credit models. Such models should be able to withstand crises such as the pandemic. A company that is able to absorb losses that would still allow it to continue business activities despite a pandemic would be the best case scenario.
Trying times like the pandemic have put some business into bankruptcy while some have survived with major scratches. More complex and uncertain scenarios give greater risk and ask for a more rigorous risk identification and management. The COVID-19 pandemic has taught the financial sector a hard lesson, and that is to be more agile and learn and use more advanced technologies, such as AI, to be able to survive any challenging scenario in the future.
Reference: bai.org