In brief

In brief

  • Banks are essential to providing stability during times of crisis. But in today’s pandemic, they face challenges of their own.
  • Chief risk officers of banks can take immediate steps to maintain a credit supply lifeline.
  • Additional actions can help banks prepare for future challenges with COVID-19, as well as future crises.


Credit supply during COVID-19

COVID-19 is now the biggest global event—and challenge—of our lifetimes. While banks traditionally play a key role in anchoring the economy amid severe economic stress, they are not immune to fallout from this pandemic.

Credit defaults top the list of immediate risks banks face. Tempting solutions such as using excess capital and liquidity to boost lending could raise asset quality implications over time. Our report, Rapid response: Keeping a lifeline of credit supply during COVID-19, explains why leaders should balance responsiveness and resiliency, applying the fundamentals of integrated risk management in building a credit supply lifeline.

Do now: Address immediate risks

During this pandemic, banking customers’ needs are as varied as customers themselves. Retail customers are shuffling bills without pay while global corporations are struggling to issue bonds to cover debts. Banks face some additional complications:

  • The economy is in a “late cycle,” at the end of a long growth period. Years of cheap money and near-zero interest rates have resulted in increased debt. This increases the risk of drawn-down credit lines: Global firms have drawn at least US$124 billion from credit lines across the United States and Europe.
  • An Organisation for Economic Co-operation and Development (OECD) report has shown we are nearing the so-called “BBB Bulge:” BBB-rated issuances now account for nearly 30 percent of outstanding corporate bonds. Even a moderate shock could shift some US$3.8 trillion in corporate bonds to “junk” grade.

Given the pandemic and the economy’s underlying condition, banks—and particularly chief risk officers—can take steps now to manage credit risk and maintain a credit supply lifeline:

Source reliable and frequent data

Develop tailored analysis, ongoing monitoring and execution capability to support a forward-looking, integrated response.

Establish a cross-functional war room

Build a dedicated team of domain specialists to help analyze intelligence, manage information flow and coordinate actions across multiple functions.

Expand stress testing scenarios

Define and run a wide range of scenarios for COVID-19 impacts. Rethink model development and validation rules to support extreme scenarios.

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This calls on leaders to strike a balance between responsiveness and resiliency. The fundamentals of integrated risk management apply more than ever.

Do next: Prepare for the future

As the pandemic continues, managing credit risk remains an important, but complex, challenge. What can banks and their chief risk officers do to help?

  • Integrate pandemic risk into the enterprise risk framework: Anticipate new requirements and policies that may arise from COVID-19.
  • Adapt decision-making models: Update credit risk models and loan origination rules to improve credit decision making.
  • Leverage regulator and central bank measures: Tap measures central banks and regulators develop to address a variety of financial concerns.

Preserving credit supply

Banks are essential to stabilizing the global economy amid this pandemic, but as we’ve seen, the climate is far from stable for banks themselves. Chief risk officers can take steps to address credit risk concerns now and moving forward, to maintain a steady credit supply lifeline for banks and their customers.

To help our clients navigate both the human and business impact of COVID-19, we’ve created a hub of our latest thinking on a variety of topics. Visit our hub and check back frequently for more insights.

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