1- The unique features of the COVID 19 crisis have led banks to move more quickly to build real-time data and analytics into their credit-decision engines. How can banks develop their own credit risk assessment systems while accurately predicting customers’ defaults?
The 2008 financial crisis was based on the banking system, or banks specifically. However, the COVID-19 pandemic and financial impact was not rooted in the banking system. The consequences as a result of “locking” down the world economies, could still potentially have a huge impact on the banking system as a whole and specifically on banks’ ability to absorb credit losses. The challenge today is that banks still need to continue to lend, in an ever-increasingly difficult credit environment. Underwriting large amounts of credit on the banks’ balance sheet with large number of non-performing loans could potentially jeopardise the banks’ balance sheet and overall economic recovery.
Banks will need to reassess their credit environment and potentially overhaul procedures and processes, which could range from technology infrastructure and early warning red flags, segmenting risk into new “buckets” (new technology retail versus old technology retail), and risk management and compliance reporting.
A number of critical developments need to be incorporated into current credit risk assessment systems, which could include:
- A process of observing and checking the progress and quality of credit over a period of time, in order to very quickly identify increased demand on financial resources. This monitoring framework needs to evolve quickly and potentially provide real time feedback to the banks providing “red flag” information.
- Procedures need to ensure that risks can be adequately measured and arranged into categories correctly. Many of the procedures banks have are outdated and haver not incorporated the COVID-19 response impact. The challenge moving forward is that banks could potentially underestimate the risk exposures.
- The idea of an “Early Warning System” (EWS) is key in credit risk assessment systems. Most banks do have EWS, however, however many banks have not updated and improved the EWS with correct client segmentation and risk enhancement procedures.
- Banks have always had large amounts of data (previous clients and current clients); however, they have not always aggregated and used the data. This needs to change and banks now have the technology to use their data base of clients to aggregate and benchmark. This will assist with the predictive processes so critical to credit risk.
2- What are the most important human resources qualifications and new technological resources needed to optimize the credit analysis process in banks?
The environment in which bankers are operating is changing with a growing need to re-assess their skills within the credit underwriting and digital environment. Credit skills will be impacted, it has become important what capabilities will be needed in this new digital world and how to develop and retain these skills. Some of the key skills which will need to be developed over and above credit underwriting knowledge, includes;
- Data preparation,
- Statistics and math,
- Data analytics,
- Robotic process automation,
- Advanced analytics and visualization, and
- AI and cognitive computing.
“Big Data” is the technology and method for collecting, organizing, processing and analysing large, structured and unstructured complex amounts of data.
Big data is made up of the three “V’s”:
- Volume – a large quantity of data,
- Velocity (speed) – process both batch and real-time data, and
- Variety – different types of data
“Predictive Analytics” is the analysis process of these large amounts of complex unstructured data in order to find order and patterns, which can then be used data which can be useful and provide business (credit) insights into the data.
Banks are known to have the most “data-intensive” business models where big data can have a huge impact. Banking industry have huge amounts of customer data, however, at the same time make least use of this data rich environment. Global banks are now beginning to invest heavily into data collection and processing technologies.
As the financial services sector is probably the most data-intensive sector in the global economy, the impact of Big Data on the sector is hard to overestimate and will need to maximize customer understanding in order to gain a competitive advantage – especially in light of the upcoming Fintech operations.
The benefits of big data within the banking industry include:
- Grow the banking book and general banking business,
- Adopt better risk management (both liquidity and credit risk management), which includes:
- Identifying risks,
- Assessing risks,
- Preventing risks, and
- Mitigating risks
- Reducing and controlling of operating costs
3- The IFRS landscape is constantly changing. How COVID-19 affected reporting under IFRS and what are the recent IFRS Accounting Issues for Banks?
The pandemic and subsequent lockdown of “society” has resulted in huge uncertainty going forward. During periods of uncertainty, all financial reporting is required to provide the users of the financial statements with information concerning the risks and potential risks which the company could be exposed to.
Some of the impacts from the “lockdown” could be:
- Reduction in turnover,
- Drop in profits or incurred losses,
- Slow down in investments and expansion,
- Difficulty in obtaining additional funding,
- Increase in loan defaults and
- Volatility in valuations of financial instruments
Financial reporting should provide both actual impact and potential impact from such events – this will involve a great deal of judgment.
There are numerous areas where the COVID-19 impact will be dealt with in financial statements. There main areas which should be considered:
- For non-current assets, such as goodwill, entities will be required to explore the additional impairment caused by COVID-19, especially due to the reduction in cash flow forecasts within in certain cash generation units (CGU),
- Inventories, especially those included within the traditional retail type of industries (with limited online presence) where the value on the balance sheet is based on lower of cost or net realizable value (NRV), will need to be assessed, with potential large write-downs to the income statement – it can be difficult to calculate the NRV during times of challenging economic environments, and
- Specifically, within the banking environment, the calculation of the expected credit losses (ECL) set out by IFRS 9 (Financial instruments) has created some major challenges as a consequence of COVID-19. The result of the lockdown has caused many businesses credit worthiness (ability to repay the loans) to be negatively impacted. The challenge going forward is the uncertainty of the long-term continuity of business (production or sales. The calculation of the lifetime expected credit losses, will be impacted by current events and expectations of future provisions and estimates. This translates into impacting the banks’ balance sheet, through the loan book.
4- A well-planned combination between branch (face to face) and digital transactions is likely to best serve the customers. How can banks’ balance between physical and digital banking? What will the branch of the future look like?
Any bank in today’s environment without a fully established digital offering (including, banking services, mobile applications, and remote deposits) will be struggling within the current environment – to remain operational will be a struggle. The banks with a good balance between physical and digital have done exceedingly well.
Banks have realized that employees can in fact work remotely. The results have clearly shown that the commercial banks who historically invested in “remote technology” with the correct cyber compliant services have in fact done very well indeed. On the other many of the bank’s customers have also felt that digital technology is working and would prefer to conduct banking from the comfort of their homes. In fact, many customers who were previously reluctant to use digital banking, have now embraced this new world of banking.
With the growing dominance of digital banking, many would think there is no need for physical banking.
Remember that that digital banking brings both cost reductions (cost-income ratio) and overall efficiencies.
There is a blend of physical and digital banking built around tailoring solutions and customer experience. The clear strategy is one of finding the between digital banking and physical banking based on products types and customer profiles. In effect finding the most efficient in both digital and physical elements.
In understanding the bank branch of the future, it is important to realize that the changing customer expectations are here to stay. The branch of the future will need to adapt to these changes in order to survive.
Three of the major changes we foresee:
- Banking product offerings and services will be tailored on a branch by branch basis, and
- It appears that the branch will be shifting to provide more of an experience and advice centre, rather than products which can be processed digitally, and
- Use of the latest technology coupled with the implementation of effective artificial intelligence.
5- As a professional trainer, what are the new trends/topics/skills that you are focusing on in Euromoney learning to equip bankers to be ready for the future? To which extend the training priorities differ between developing and developed countries?
The overarching trend over the last 18-months in the learning arena has been the virtual training offering, which has proved to be effective and efficient.
The next major shift has been towards a training offering that couples together both qualitative skills and soft skill training.
The third key offering has been training in technical areas, however, with the shift towards driven to customer outcome-based training – that is, how will this training benefit for our team to deliver to the bank’s customers?
We have seen an increase in the following training topics:
- Early Warning Signals
- Corporate and Private Banking Relationship Management
- ESG (Environment, Social and Governance)
There has not been a major difference in training priorities between developed and developing countries.