PRMIA Intelligent Risk - July, 2020

INTELLIGENT RISK knowledge for the PRMIA community

July 2020 ©2020 - All Rights Reserved Professional Risk Managers’ International Association

PROFESSIONAL RISK MANAGERS’ INTERNATIONAL ASSOCIATION CONTENT EDITORS

INSIDE THIS ISSUE

Steve Lindo

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Editor introduction

Principal, SRL Advisory Services and Lecturer at Columbia University

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‘New age’ risk frameworks in a post-pandemic world

by Kristen Gantt

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Is accounting to blame for the pandemic? - by Peter Hughes

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2020 - the year a virus put the world on hold - by Alex Marinov

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Long-term consequences of the COVID-19 crisis for risk professionals - by Oscar D. McCarthy

Nagaraja Kumar Deevi

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Managing Partner | Senior Advisor DEEVI | Advisory | Research Studies Finance | Risk | Regulations | Digital

PRMIA Risk Management Challenge goes virtual in the face of COVID-19

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After the storm: long-term risks in the aftermath of COVID-19 - by Merlin Linehan

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Known unknowns: assessing liquidity in the age of COVID-19 - by Don Mumma

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Capital planning in COVID-19 economy – closer look on the U.S. - by Piotr Buzala

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The insurance industry and risk managers are poised to ensure the future - by Teresa Chan

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COVID-19 and libor transition: taking a market-led approach - by Navin Rauniar

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IBOR transition: implications of COVID-19 on spread adjustments from a conduct risk perspective - by Maximilian Beckmann, Stefan Wingenbach, Peter Woeste Christensen

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COVID-19 impact and CBUAE’s response

by Aakash Ramchand Dil

SPECIAL THANKS

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COVID-19: opportunities for the U.S. individual life insurance industry - by Varun Sood

Thanks to our sponsors, the exclusive content of Intelligent Risk is freely distributed worldwide. If you would like more information about sponsorship opportunities contact sponsorship@prmia.org.

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Crisis fraud risk management - by John Thackeray

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Embracing for a world post COVID-19 lockdown

by Vivek Seth

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COVID-19: credit action plan for banks

by Elmarie Van Breda

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How is your pandemic plan working with your vendors?

by Branan Cooper

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The impact of coronavirus on global economy

by Maya Katenova

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Professional Risk Manager profile - by Adam Lindquist

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PRMIA Netherlands spotlight

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Calendar of events

Dr. David Veen Director, Evaluation Services - IT at Western Governors University

FIND US ON

prmia.org/irisk

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@prmia

Intelligent Risk - July 2020

editor introduction

Steve Lindo Editor, PRMIA

Dr. David Veen Editor, PRMIA

Nagaraja Kumar Deevi Editor, PRMIA

In this July issue, PRMIA’s Sustaining Members and PRM™ holders contributed a diverse set of articles posed by the COVID-19 pandemic and focused on long-term risks and opportunities. The global economy continues to struggle with the evolving healthcare crisis which has created widespread social unrest, higher unemployment, and increasing casualties, while prospects for economic recovery across the globe are still uncertain for the coming quarters. We would like to acknowledge the authors for taking the time to share their thoughts from their personal and professional experiences during these challenging times.

We hope that PRMIA’s member community will enjoy reading the articles published in this issue as much as we did reviewing and editing them. We would like to wish that PRMIA members continue to stay healthy and safe and follow the instructions and guidelines from their respective communities at large.

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Learn more Intelligent Risk - July 2020

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‘new age’ risk frameworks in a post-pandemic world

by Kristen Gantt In this unprecedented time of uncertainty caused by COVID-19, we are moving from ‘sheltering in place’ to slowly re-opening both our businesses and personal lives. We’ve launched into a surreal and futuristic world almost overnight with rapid change in business models, delivery channels and ways to interact with customers and stakeholders. Looking back, some organizations have used this time as an opportunity to bounce forward by reinventing the way they do business, while others struggled to bounce back and maintain relevance.

In either scenario, this new world raised the bar high on adaptability. During the disruption, both previously known and unanticipated risks are prevalent. What’s clear is that resiliency through change requires vast increase in the speed and quality of intelligence from the owned business operations and extended enterprises on which the business depends. Known risks changed the degree of ‘heat’ based on new operating models and processes that run them. Unanticipated risk scenarios presented themselves and required quick understanding of the new underlying processes, fast assessment of potential threats, and rapid design of risk treatment to reduce the potential for significant loss.

How then do risk frameworks adapt to the new normal? This article, exploring a variety of useful techniques aimed to vastly improve the quality of risk intelligence, beyond core GRC and risk data structures. Some of these methods are borrowed and re-invented from other business operations and/ or industries, and each is designed to help risk frameworks ‘bounce forward’ in this new era.

‘new age’ risk assessment: a focus on process discovery The interconnectedness between traditional risk ‘domains’ has become undeniable. The common denominator between risk categories, or ‘domains’, and the Lines-of-defense (“LoD”) who manage these risks, is clearly the end-to-end (“E2E”) processes used to deliver critical goods / services through defined products.

What the COVID-19 experience has reinforced is that the extended enterprise including third-party, its people, processes, technologies used to deliver quality goods / services are inextricably entwined to sustain delivery of these products and services. At the same time, a significant proportion of regulatory obligations directly link to how the organization decides and processes transactions. To enable compliance, processes and control activities need to be well-designed. Ultimately, siloed risk assessments based on siloed views of E2E process can no longer survive the new era.

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Current approaches challenge the value of risk assessments. Typical risk assessments start with an assessor formulating a risk profile for each Line of Business (“LoB”) by developing top-down risk statements, tying risk appetite to the business objectives. The assessor then shifts to create a bottom-up operational view of various risk scenarios, ultimately to compare results with the top-down risk profile. The frailty in this approach lies within the incomplete, inaccurate and potentially biased view of actual processes operating in the business. While an assessor may takes weeks or months to discover and document the underlying processes, the actual processes may have: a) changed significantly, making the documented understanding immediately outdated and/or incomplete; and b) represent only the assessor’s divisional view of the E2E flow.

Exhibit A in the diagram below illustrates the drivers in obtaining disparate E2E process understanding, based on the activity drivers for each risk domain.

Exhibit A – Siloed LoD E2E Process Context (green) documented separately in static visual based on point of view of each LoD

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Let’s use a hypothetical scenario that illustrates the frailty of current risk assessment methods: The Compliance group of a US FSI is performing a risk assessment. After identifying the regulatory inventory, the compliance risk assessor maps the parts of the process where risk non-compliance can occur and included third parties in their assessment with compliance risk ‘in-scope’. Results are entered into their GRC system of record and tests of controls designed.

At the same time, the IT risk folks are looking at the same processes where the IT asset is linked, assessing risk of program and data breaches, including third parties where IT risks are deemed most relevant. IT risk group created a separate data flow diagram depicting the same process documented by the Compliance group.

Each of these risk groups’ E2E process maps took weeks or months to create a static view say, using MS Visio™. Methods used to create the E2E visual included separate management interviews and observation to piece together these disparate views.

At the same time, the COVID-19 pandemic hit, and the FSI had to rapidly respond by changing its operating model – in fact, depending on the location (NYC hotspot vs. non-hotspot area), new variations in process had been created ‘on the fly’. The controls designed to mitigate risks within the current Visio understanding of E2E process flow were fit for purpose for each LoD group; however, not knowing the actual process changes, the same controls may be unfit for purpose, inefficient or ineffective at mitigating exposure to the risks.

As a result, with the new WFH environment and process changes, this organization bypassed several internal controls used to ensure compliance to the regulations. The regulators received complaints, and infractions were identified in the WSJ and regulatory publications.

This hypothetical case study illustrates a risk framework that produced disjointed views of the extended enterprise, processes, technologies and related controls embedded in the process. In this case, the organizational risk framework was not able to change its views quickly enough to manage the new risk profile, making it difficult to adequately designed or collaborate on risk responses -- even with a mature integrated GRC system of record in place.

What does a ‘new age’ risk framework look like and how is it different? The short answer is the ‘devil is in [knowing] the [real] details’ – which are perpetually changing. If we turn the current risk assessment framework operating model upside down (or right-side up!) by starting with a closer-to-real-time shared view of E2E process, we can then use our collective domain expertise and risk lenses within the LoD to cull-out the risks and a coordinated risk response.

Today, most siloed LoD areas create their own views of process, highlighting the area of process most pertinent to the LoD’s own risk lens as they alone are the consumers of their view of the business.

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This hypothetical case study illustrates a risk framework that produced disjointed views of the extended enterprise, processes, technologies and related controls embedded in the process. In this case, the organizational risk framework was not able to change its views quickly enough to manage the new risk profile, making it difficult to adequately design or collaborate on risk responses - even with a mature integrated GRC system of record in place.

Exhibit B – Shared E2E Process Context (green) using process mining AI – each LoD attains transparent visibility into E2E Processes closer-to-real-time

Consider a ‘new age’ process discovery using process mining AI tools. Now, let’s consider a new scenario.

Say all LoD had access to a single, centralized view of truth of the actual E2E processes and data flows operating real-time? Further, using this approach it took 3 or 4 days to create an E2E visual of the actual process flow, including all variations across multiple geographic units. Further, the Visio previously created was converted into a machine readable BPMN format and compared to this ‘real-time’ view of E2E process.

We’ll now replay the above hypothetical scenario using advanced process mining techniques: The Compliance group of a US FSI is performing a risk assessment. After identifying the regulatory inventory, the compliance risk assessor accesses the central E2E process flow view recently uploaded to the central Process Visualization system – all third parties and IT systems are identified on this map.

After executing a ‘Conformance Check’ against the current Compliance Process Visio (after converting into a BPMN), the Compliance risk assessor identifies the following:

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• New processes are identified in the central E2E view, not shown on the reference Visio – the Compliance Risk Assessor considers the appropriateness of the process, introduction of new risk scenarios, and updates the reference Visio as needed.

• Control processes shown in the reference Visio are not shown in the central E2E view. The Compliance risk assessor collaborates with the IT Risk group to innovate the design of a new control with utility properties that reduce both Compliance and other risks.

• Using data flow analysis tools in the central E2E view, the risk assessor notes 22% of the transaction flow skips over the established control(s). The assessor immediately identifies transactions to be tested to ‘Discovery’ testing.

• New Processes and controls are added to the GRC system of record to link to refreshed RCSA and Testing record.

• The Compliance Risk assessor observes several other control steps in the central E2E view not considered ‘key’ in the reference Visio. These control steps are shown in the central E2E view to be manual, and the cycle time to process through the controls adds 5 extra days to throughput. The Compliance Risk assessor innovates an RPA use case to replace the manual controls to work in conjunction with the key control At the same time, the IT risk folks are looking at the same central E2E process where the IT assets are all identified. Since dataflows and applications are shown in the central E2E process visual, the IT risk group proceeds in focusing on mapping shared services of Info Security processes.

• The IT Risk Assessor noticed a significant increase in volume of transactions moving through an application that is designed to handle a small number of transactions. Throughput times were also noted to have increased by 3 business days.

• The IT Risk Assessor-observed transactions are moving through a process supported by a new application provided by a new vendor, not included in earlier IT Asset inventories – a new risk assessment was created immediately.

As the COVID-19 pandemic changes the ‘return to work’ and ‘social distancing’ guidelines naturally over the next few weeks, these changes required the FSI to modify the process two more times.

Each week, the central E2E process tool has current data uploaded to create new process analyses.

As new processes are compared to prior versions, new insights are captured close-to-the-speedof-business.

As a result of being able to stay ahead of business and risk landscape changes, risk management alleviated time to focus on proactive customer and stakeholder communications, increase the efficiency of the control processes, and reduce compliance infractions in the operations.

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Benefits using process discovery. With process discovery tools, each risk assessor was able to leverage the same current version of truth and perform analysis that met the needs of the LoD domain expert focus (e.g., Compliance or IT Risk). Each was able to focus more time and talent on identifying new risks and designing efficient and effective controls and develop closer-to-real-time monitoring metrics tied to business performance and risk reduction.

Risk managers have also become innovators by identifying areas where controls may be transformed using AI, RPA and other advanced analytics by analyzing throughput time reduction opportunities where bottlenecks or rework occurs where manual controls are ineffective or bypassed.

author Kristen Gantt Kristen Gantt is Managing Director ATS Solutions LLC, a risk advisory firm while also serving as an advisory council member of the Risk Management Association (RMA) Internal Auditors Society. Kristen recently held a Specialist Leader GRC Solutions role within Financial & Risk Advisory at Deloitte & Touche, LLP in U.S., responsible for developing service strategy and advising clients seeking to mature their integrated risk management programs and platforms. Prior to Deloitte, Kristen was regional vice president industry solutions at MetricStream, Inc. for five years, and responsible for establishing integrated risk management capabilities at key US Financial Services industry (FSI) and manufacturing industry clients. Prior to MetricStream, Kristen held a U.S. operational risk management leadership role at Natixis Corporate & Investment Bank as well as having over fifteen years expertise in the Internal Audit discipline as a senior manager / director for several major FSIs, including J.P. Morgan.

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is accounting to blame for the pandemic?

by Peter Hughes interconnected networks and systemic risk Banks and airlines have something in common: they both have the potential to transform an isolated and sometimes freak event into a global economic crisis. In fact, any industry whose business is dependent on globally interconnected networks, whether digital or physical, possesses this awesome potential.

Experience has demonstrated that network-fueled escalations of risk can be so devastating that commercial protective frameworks in the form of insurance and firms’ own capital reserves are not always able to buffer the resulting financial losses. This often leaves governments with little choice but to step in as insurers-of-last-resort with the taxpayer acting as underwriter.

The financial sector dubbed such escalations of economic fallout ‘systemic risk’. Systemic risk typically originates with a major, internationally active financial institution that occupies a pivotal role in globally interconnected electronic networks. If such an institution fails to maintain its operational integrity or becomes unable to fulfill its commitments to deliver cash or securities, there is an immediate knockon effect on other financial institutions. In effect, systemic risk relates to the potential of one influential financial institution to ‘infect’ many others that are operationally dependent on the same networks.

the airline industry – a case study Airlines cannot be accused of originating the COVID-19 pandemic; however, they certainly played a role in its spread across the globe. In their annual reports, airlines consistently identify pandemics as a principal risk. For example, in its 2019 annual report (Form 10-K) United Airlines wrote, “An outbreak of disease or similar public health threat, such as the coronavirus, could have a material adverse impact on the company’s business, operating results and financial condition.” By any definition, this constitutes an accepted risk.

The impact of the pandemic on the airline industry has been truly devastating. All airlines have suffered a material loss of revenues, and many are facing insolvency. Arguably, airlines are the architects and victims of their own disaster given their role in transporting infected passengers around the globe.

Having identified pandemics as a principal risk and publicly disclosing it in annual reports, they found themselves woefully unprepared to respond as the real-life pandemic unravelled.

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operational risk and the role of accounting In the case of systemic and pandemic risks, we are in the realm of operational risk. A fundamental accounting principle is the accrual concept which requires revenues and expenses to be accounted for when they are earned or incurred, not when they are settled through receipt or payment of cash. That being the case, it begs the question whether the expected losses associated with accepted risks should be accounted for in the form of loss provisions; after all, if a risk is accepted any probable loss associated with that risk is also accepted.

In business, there is a truism; if you want to get senior management’s focus on an issue, hit their wallets.

In the case of operational risk, that means finding a valid exposure quantification method that can be used to charge businesses’ profit & loss accounts with the probable cost of accepted risks. The weaker the risk mitigating infrastructure and processes, the greater the charge which adds to the cost of sales and services and reduces the dividends and bonuses that can be paid to investors and employees respectively.

Presumably, accountants and auditors have not considered whether provisions for expected operational risk losses should be framed in GAAP (generally accepted accounting principles) given the current mindset that such risks cannot be quantified.

a call for banks’ leadership Admittedly, the title of this article is somewhat tongue-in-cheek. Nevertheless, the absence of a requirement to account for the probable cost of accepted risks does have its consequences. In particular, it removes accountability for the effective mitigation of risk and opens the door to underinvestment in risk mitigating infrastructure and processes. This in turn allows firms to offer products and services too cheaply, creating opportunities to play fast-and-loose with customers, the environment, and public health and safety. Critical industries may also find false comfort in the expectation that governments will bail them out to avert an economic catastrophe.

The banking sector’s regulators have powers that allow them to mandate the setting aside of capital reserves for operational risks. However, this should not be viewed as a panacea for other industries. The absence in banks of explicit and dynamic quantification of exposures to operational risk gives the Basel Committee free rein to impose whatever minimum capital requirement it believes will protect depositors and taxpayers from any conceivable operating disaster. The result is well-managed and sophisticated banks being forced to hold inert and costly capital reserves well in excess of their operating requirements.

So, we are faced with a juxtaposition; in all likelihood, banks are holding excessive and costly operational risk capital reserves while other industries hold too little. This provides banks with an incentive to lead on finding an accounting expression for accepted operational risks, which might not be as difficult as they think.

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author Peter Hughes Peter Hughes is a chartered accountant, chairman of the Risk Accounting Standards Board at SERRAQ and a visiting fellow and advisory board member of Durham University’s Centre for Banking, Institutions and Development (CBID) where he leads research into risk-based accounting methods and systems. He is a former banker with JPMorgan Chase where he held senior positions in risk management, finance, operations and audit.

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2020 - the year a virus put the world on hold

by Alex Marinov Covid 19 - brief history overview So, what is the history of this virus, and where did it come from?

In late December 2019, it was reported that there was an outbreak of a new virus in the Wuhan province, China. It led to the death of more than 3,000 people, while more than 81,000 tested positive, while many more went undiagnosed. The severity wasn’t widely understood until it led to an unprecedented threemonth lockdown, where people were confined to their homes and only the most essential of work continued such as grocery stores, hospitals, pharmacies, and others.

Initially, it was thought to be an isolated area of the disease, but it spread fast throughout China and sadly things took a turn for the worse when cases started appearing elsewhere in Asia, Europe, and the USA. Italy recorded its first official case on January 29, but there weren’t enough restrictions in place and people weren’t following social distancing guidelines. This led to an outbreak, and the country was on a severe lockdown starting March 11 in an effort to stem the tide of ever-increasing infections and deaths.

Since then it has spread throughout the globe, and unfortunately more deaths have been recorded.

The immediate impacts from this virus are several: • Affects elderly people disproportionately • Easily transmitted • No symptoms for up to 14 days, easing transmission • Led to severe lockdowns across the globe in an effort to slow the spread of the disease The impact of this virus is very difficult to quantify currently as it is still ongoing but based on the number of causalities and infected population it has definitely become the number one agenda that needs to be resolved in the new decade.

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economic impact in economies across the globe Has there been any impact to the wider economy? Yes, there has been a profound impact on the wider economy.

Developed economies The stock markets experienced a severe 30% drop - the single worst day for stocks since the 1987 Black Monday crash. In addition to that the significant decrease in business activity and the fact that vast numbers of economies were effectively put on lockdown caused oil prices to collapse to levels not seen since the 1990s-Western Texas Intermediate oil went down to $10, while future prices went briefly to negative territory - something unthinkable in modern times.

Meanwhile, retailers were forced to cancel orders worth billions, thereby spreading the economic pain to their suppliers in Asia. Even a minor decrease in such orders could have major ramifications for the local economies and the millions they employ. Some analysts suggest that just a 10% decline in exports could lead to a 4 to 9% drop in employment just in Bangladesh. Another sector that was severely impacted was transport, specifically air travel. Airlines have had to ground their aircrafts, thereby completely eliminating their business altogether. It is estimated that air traffic has reduced by close to 77%. Shipping has decreased significantly up to the point that some international ports are seeing half the shipping traffic that they would normally expect. Governments across the globe were forced to distribute a vast amount of stimulus packages - the USA gave worth close to $25 billion dollars; KLM-Air France got a $7.7 billion package; Singapore Airlines got $13.3 billion. These show that impact to the sector has been profound and absolute, while many airlines were forced to put their staff on furlough schemes, ask them to take unpaid leave, and even announce severe reductions in the level of employment.

The frozen economy has had a ripple effect to businesses of all kinds, and governments have been forced to implement unprecedented and unimaginable measures not seen since the Great Depression.

Both in the UK and USA government have implemented business loans (guaranteed in some cases up to 100%), provided business loans to keep companies afloat in these difficult times with the condition that they wouldn’t fire people and offer to pay furloughed employees up to 80% of their normal salary, while the measures are in place. However, even with these extreme measures the economies are suffering. In the USA close to 40 million people have become unemployed a level not seen since the Great Depression.

Governments and central banks have reacted urgently and with great speed by providing loans and guarantees for businesses but the issue is that under a continued lockdown people without income cannot buy goods, and companies won’t be able to sell those goods creating a perfect store, where there is no demand for lack of income and no supply due to not having enough sales. Current projections by the IMF are that there will be a 3% reduction to the global economy this year.

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Developing economies The effects have been even more pronounced in developing countries.

For one, developing economies are extremely dependent on developed economies for trade, investment and technical expertise.

The vast majority of developing countries depend on some form of commodity exports to balance their budgets, but sadly the global lockdown has pushed their prices to lows unseen in previous generations, an example being oil prices. For those of you that are interested in a more detailed overview of the commodity markets the World Bank has published an extensive study in April on the outlook for 2020. (https://openknowledge.worldbank.org/bitstream/handle/10986/33624/CMO-April-2020.pdf) The other significant impact has been the sudden decrease in commerce and trade on a global level. This is diminishing a lot of foreign investments on which developing economies depend to improve the financial situation and employment situation of their population.

In addition, a lot of countries were hit with the COVID-19 virus much later. Only in the last month has India implemented a lockdown that is supposed to last 40 days, which was necessary given the rising levels of infections that risked overwhelming the healthcare system. In Africa, the situation is extremely difficult due to a number of reasons. There are not enough ventilators, some countries have single digits, and some have none at all. The other issue is lack of enough intensive care beds. Another area of concern is that the lack of investment and trade, as well as limited sources of revenue, could have negative consequences on their budgets making it extremely unlikely that they would be able to service their debts.

Calls for debt relief amounting to billions worth of dollars have been made, in order to give developing economies some breathing room, so that they can actually fight the current pandemic. However, there is lack of certainty, whether these measures would be implemented. A significant cause of concern is also the lack of medical equipment and hospital beds, which make diagnosing the virus and taking care of the sickest patients very hard.

But the major impact the virus is having is the lack of certainty, when economies could restart as we live in a very globalized economy, where such sudden shocks have brought millions to the brink and have increased the risk of poverty for countless of people across the globe. The World Bank estimates that 40-60 million people will be pushed into extreme poverty. For more information, please see: https://blogs.worldbank.org/ opendata/impact-covid-19-coronavirus-global-poverty-why-sub-saharan-africa-might-be-region-hardest But how does the current pandemic compare to other diseases in the past? Surely, mankind must have faced something similar before.

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way forward So, what is the way out of this crisis and the severe lockdown that was imposed on both people and businesses?

It is not quite clear, as the situation is changing constantly, which makes it extremely hard to predict or even forecast what is going to happen next, especially on the economic side of things.

Restarting an economy and making business start to invest and trade is much more difficult than stopping it. Hiring and training new staff takes time, and creating a viable business model in these difficult times is making things much more complicated. Still, some countries such as China have slowly started to lift the restrictions. China, which was first affected, has just started to lift restrictions after almost 3 months of zero movement policy (people were not allowed to leave their homes). In the Western countries the situation is anything but clear as every country has implemented different measures. The most severely impacted implemented strict curfews but some movement is still allowed only for essential shopping and basic exercise. Still, the virus is ever-present, and there are a handful of viable options from this scenario.

What is the way forward? Governments have posed the below options as a viable way forward but without any clear guidance if these will even happen in the specified timeframe. For now, they remain best estimates, or in another word, guesses.

• A vaccine is developed; This process can take anything from 18 months (optimistic) to 5 years or more; The reason being that vaccines take time to develop, test, implement and then produce on an industrial scale • Herd immunity approach – this is one of the most heavily criticized ways out of the crisis, as it relies on the fact that close to 70% of all of the population, but that would mean that millions of people would get affected and potentially die, which makes this a very dangerous approach; • Limiting the spread of the virus, while having some social distancing measures in placereducing the number of infected by limiting the social interactions as well as decreasing the overall number of people who can get the disease seems to be the most sensible approach so far; however, the biggest downside is that a lot of people have to be supported by financial means during the pandemic as reported above, so many people were made redundant in such a short space of time; The other downside is that it is not clear how long these measures would be in place because as soon as they are lifted any asymptomatic virus carriers could spread the virus once more.

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conclusion Diseases have been part of human society as long as we have been on Earth. Many pandemics have come and gone and yet humanity has still survived to become the dominant species, but with that dominance come many risks, especially with globalization. What this situation has shown is that a virus can quickly grasp the globe in the space of a few months, but it has also shown the resilience of the human spirit and society as a whole. Hopefully, these virtues combined with our dedication to find a solution to the current crisis will prevail and help us move forward from these challenging times.

author Alex Marinov Alexander Marinov is a Senior Consultant, Data Scientist at Deloitte. Mr. Marinov has been working in the financial services industry since 2013. Prior to joining Deloitte, he worked at Barclays Investment Bank and BNY Mellon. Mr. Marinov has a MSc in Economics and International Financial Economics from the University of Warwick and Bachelor’s in Economic and Social Studies from the University of Manchester. He is a PRM holder since 2015.

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long-term consequences of the COVID-19 crisis for risk professionals

by Oscar D. McCarthy, PRM The COVID-19 crisis has already significantly impacted society, with widespread lockdowns in place to manage contagion risk and emergency measures in place to mitigate the associated economic damage. Risk professionals in the finance sector are dealing with the immediate consequences of these, relating for example to market volatility and credit provisioning, while working remotely. But what are the longer-term consequences of the crisis - and what do they mean for risk professionals? In this article we consider the longer-term impacts of government and central bank policies and their societal and technological consequences on the industry and profession.

the story so far The immediate consequences of the pandemic are obvious, with lockdowns triggering a global recession and the economy kept alive on state aid: Zombie has become the corporate norm for many.

Hence institutional balance sheets are becoming strange animals, with massive volatility in the trading book, a bloated state-backed loan-and-funding book, and operational anxiety as we (stress) test the limits of remote working.

A number of early observations can already be made from this crisis. The first is that the pandemic is far from over, and quality of government response is crucial: compare the mortality rates in neighboring countries, and extrapolate from this the confidence with which people will return to pre-crisis behaviors.

The second is that GDP contraction will be significant. Many official economic forecasts implicitly assume a V-shaped recovery. Given the non-symmetric nature of a pandemic (quick to escalate, slower to die down), this seems optimistic. There is significant room for pessimism in corporate financial health, with significant increases in insolvency. Given that state support schemes cannot last indefinitely, more failures will follow: this suggests that financial market corrections may be due. Financial Institutions should stress test numerous pandemic recovery scenarios, both for their own balance sheets and that of their clients and counterparties.

what’s next?

The principal unknown factor is duration: how long does the pandemic last, given that vaccines are a long way off? A certain amount of informed scepticism may be in order here.

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Does this mean that we spend 2021 in a permanent amber state, with travel bans and track/trace tools used to minimize future outbreaks? And, crucially, where does this lead us? It’s the longer-term consequences that should give us pause for thought.

economic consequences We are entering what will be the worst recession since the 1930s, with some economic historians looking as far back as the 1700s for comparable shocks. Ultimately, there are only so many businesses can be kept alive for so long: many more businesses will fail.

An extended pandemic will weaken the solvency of financial institutions, as insurance claims and bad debts spiral. In the short term, zombie companies can be kept alive through debt forbearance, and zombie banks proliferate as a consequence. Insurers will be less lucky, with less state appetite for deferral of claim payouts, combined with another prolonged period of near-zero or negative rates: not all will survive. Many financial institutions will need to re-capitalize; all will need to significantly change their operating model to lower expenses. We will likely see a lot of mergers and acquisitions.

An extended pandemic will also create tensions in the sovereign debt market. How do governments plan to finance the large and growing deficits? Political tensions mean that US deficit financing is less obviously available from China, and EU deficit financing requires structural reform. The squeeze will however hurt other, lower-rated borrowers: prepare for IMF interventions in those emerging markets hit hardest by the pandemic, such as Latin America. In southern Europe, the Euro crisis of the last decade threatens to re-awaken, especially if the EU institutions are politically and legally constrained. Monetary financing, until recently taboo, re-enters the policy toolkit, with hard-to-predict consequences. Future government decisions on how pandemic relief is financed will have a far-reaching impact on global economies.

societal & technological Our relation with the state is changing, with the nation-state as the guarantor of public health and economic security. Public health management will become more intrusive. Privacy is dead, but arguably this is a compromise we have to make. More generally, a societal shift with government intervention more in vogue than ever, but with potentially dystopian hues if combined with a large increase in surveillance. As our ever-closer relationship with technology grows, through remote working, social connectivity, and societal surveillance, does society become less free? Watch closely to see how different governments use their newfound powers.

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recovery Longer-term, global economies will need to recover, which in many sectors will require Keynesian stimuli.

A command/control economy increases state-directed investment and points to potential future credit problems. It also turns the finance sector into an agent of state regulation in many industry sectors, with institutions required to enforce state aid rules in targeted sectors. Corporate risk management will need to mature, with a better appreciation of uncertainty, and a renewed focus on resilience and sustainability.

Institutions will increasingly need to promote these standards via their lending, investment and underwriting programmes. Client relationship managers thus become evangelists for better risk management.

A key question will be the extent to which these Keynesian stimuli will spur environmental policy shifts. Some will say the current crisis underscores the need for sustainability; others will say this is an expensive luxury, no longer affordable. Who will win the argument? The early signs from bodies such as NGFS and ECB are that many central banks lean to the former view, seeing sustainable infrastructure as having a double pay-back: recovery from the current crisis, coupled with mitigation for the next. It remains to be seen how widespread this view is and to what extent this becomes the golden asset class of the next decade.

conclusions As the pandemic crisis continues, sovereign powers and responsibilities will continue to increase globally.

Some will buckle: watch for troubled FI/Sovereign exposures. Some will struggle: watch for strained international relations and broader impact on global economy. Watch also for enlightened public policies: these will show the light at the end of the tunnel.

This article is an abridged version of a PRMIA webinar broadcast on 8th June 2020, available to Sustaining, Contributing, Corporate, and RIM members. Download now. The author thanks Colin Lawrence, Bob Mark, Ken Radigan, and Alex Voicu for useful conversations.

author Oscar D. McCarthy Dr. Oscar D. McCarthy, PRM, is the Vice-Chairman of the PRMIA Institute, PRMIA’s scholastic arm for the development of professional risk management standards of practice. He has 20 years’ experience of Commercial and Investment Banking throughout Western Europe, covering all major risk types and asset classes. Previous industry positions include Head of Research at Avantage Reply, a risk consulting firm, and Head of Policy at ABN Amro. Oscar has a Ph.D. in Mathematics and is certified as a Professional Risk Manager.

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PRMIA Risk Management Challenge goes virtual in the face of COVID-19 The 58 student teams participating in this year’s Risk Management Challenge case competition faced an extra challenge – going virtual due to COVID-19. Lauren Tabolinsky, Academic Programs Manager for MathWorks, the 2020 Risk Management Challenge global sponsor, shares, “Students from around the globe had been working for months on their case solutions to the PRMIA Risk Management Challenge. When cancellation of the inperson finals event became imminent due to COVID-19 restrictions, PRMIA and MathWorks embarked on a collaborative effort to host the competition in a virtual environment. This nimble response to a rapidly evolving situation enabled these dedicated students to reap the benefits of the competition and resulted in a highly successful event for everyone involved.”

The annual case competition empowers undergraduate and graduate students by taking them beyond the classroom and giving them exposure to real-world business situations. The Challenge offers students the opportunity to apply the concepts they have learned and showcase their knowledge, critical thinking skills, leadership, and presentation abilities. Our congratulations go out to this year’s champions, Team 9893 from Baruch College, New York: Alyssa Wei, Li Jin Chen, Kanica Khatri, and Claudio Matteo Lin. The 2020 Risk Management Challenge focused on addressing risk management at the Long-Term Capital Management Hedge Fund. Teams worked on improving the risk governance of the fund and on developing a contemporary stress testing scenario for the fund. Trade analytics were employed on various trading strategies to evaluate their risks, and the counter-party structure of the fund was analyzed and redesigned for improved resiliency.

Students also participated in a MATLAB challenge, designing their own pair-trading algorithms that were tested out of sample and were scored for performance, improved parameterization, and risk analysis.

To read more about the 2020 Risk Management Challenge, read the feature article in the May/June issue of Associations North.

To view the recordings of the PRMC, please visit PRMIA’s YouTube channel.

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after the storm: long-term risks in the aftermath of COVID-19

by Merlin Linehan In March 2020, millions of office workers around the globe packed up their desks and almost overnight became remote workers. They left behind daily train journeys, coffees with colleagues, and crowded meetings for a new world of virtual meetings, makeshift home offices, and juggled teaching with emails.

Now many firms are struggling to survive an unavoidable global recession. However, they also need to react now to the longer-term risks facing the economy.

• COVID-19 will act like a fast-forward button, accelerating long term trends such as a shift to home working, rising economic nationalism, and corporate sustainability.

• Long-term structural shifts in the economy will permanently reduce demand for many sectors.

New working and social patterns will threaten sectors such as airlines, entertainment, restaurants, and international tourism.

• Shocks like COVID-19 create recession, mass unemployment, and most likely major political aftershocks. However, shocks also trigger innovation, ingenuity, and new opportunities.

globalization under fire Globalization was already under threat from nationalism and trade wars like the US-China disputes.

When COVID-19 first appeared in Wuhan at the end of 2019, the main concern in the West was around disruption to supply chains that originated in China. Companies dependent on supplies from China faced and experienced shortages of pharmaceuticals, PPE, and many other goods.

These problems may ease soon. However, long-term firms may seek to make their supply chains more resilient. This could mean more “inshoring”, shortening and simplifying these often complex, opaque chains. Economic nationalism or economic independence may also see barriers raised to prevent shortages of critical medical supplies or the supply of goods deemed strategic or valuable such as rare minerals, oil, and food.

A new world means new opportunities and markets. Tech companies that provide work from home services like video chat should have a bright future, as should domestic tourism in a world scared to fly and online delivery services. Zoom, a digital communications firm specializing in video meetings, had 10 million daily meeting participants in December 2019. In April 2020, just four months later, Zoom counted more than 300 million daily meeting participants.

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Less obvious niches like drive-in cinemas could also enjoy a boom. The collapse and retreat of many firms due to COVID-19 will result in a wave of consolidation and restructuring. The successful firms of the future will be those that prove resilient now.

COVID-19 and climate change The prospect of economies in ruins, unprecedented recession, and mass unemployment will prompt many to assume that action on climate change is no longer a priority. However, a COVID-19 recession is a stark reminder of how nature can deliver a deadly shock. COVID-19 is a dress rehearsal of how climate risks may soon affect society.

Disruption is a harbinger of change. Deep recession is the time and opportunity to remodel the economy on sustainable lines. This means building back better, sustainably. Kristalina Georgieva, MD of the IMF commented, “If this recovery is to be sustainable - if our world is to become more resilient - we must do everything in our power to promote a green recovery.”

governments and firms can build on policies already in place: • Invest in green resilient infrastructure that can cope with a changing planet. The world will experience more heat waves, sea level rise, and extreme weather as climate change becomes more intense.

• Mandate measures like the Task force for Climate Related Financial Disclosures (TCFD) reporting which identifies climate risks in banks’ portfolios. Canada launched the Large Employer Emergency Financing Facility (LEEFF) designed to support employment during a COVID recession. Any firms receiving funding will have to publish climate-related disclosures (TCFD).

• Use renewable energy sources to help mitigate climate change.

• Encourage green infrastructure: cycle paths, electric vehicle charge points, and a faster broadband to make it easier to work from home • New stimulus packages combined with a restructured economy could be the impetus for a more sustainable economy. The world will look closely for green credentials in China’s forthcoming economic recovery package. The EU is pushing ahead with its EU Green New Deal in conjunction with its COVID-19 emergency response package.

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the long-term risks for a “brown” recovery A “brown” recovery is one based upon traditional energy sources such as oil and coal. These energy sources feed resource intensive sectors such as cement and heavy industry these activities magnify climate risks through greenhouse gas emissions. A world of more extreme weather events, deadly heatwaves, and sea level rise will disrupt economies in way that dwarfs the current crisis.

Companies that are not reducing emissions may be penalized by governments or consumers. France has made reduction in emissions and domestic flights a condition of its bailout of Air France. Consumers could increasingly shun firms that are not acting responsibly on reducing emissions or taking sustainability seriously.

author Merlin Linehan Merlin Linehan is a Risk Manager at the European Bank for Reconstruction and Development, working in the Risk Department focusing on Crisis Management and Business Resilience. My focus in the last few months has been the Crisis Management Team which has guided the Bank through the COVID-19 crisis.

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known unknowns: assessing liquidity in the age of COVID-19 Pandemic forces financial institutions to get ready for once-in-a-lifetime liquidity reporting challenges

by Don Mumma Throughout the COVID-19 pandemic, as governments prepared themselves for worst-case scenarios and financial markets whipsawed between record one-day losses and gains, a single variable has been keeping the world’s central bankers awake at night – liquidity.

With memories of the 2008 financial crisis still fresh, monetary authorities are all too familiar with the chaos a credit liquidity crunch could cause, and they responded quickly and aggressively with stimulus and interventions designed specifically to stave off that risk. Along with the focus on maintaining liquidity through central bank actions, the COVID-19 crisis conjured several other spirits of the crisis past. Among them is the host of new liquidity reporting requirements for financial institutions that were put in place after the 2008 crisis. Few thought they would ever be used again.

Many thresholds have already been reached by many institutions – offering a roadmap for what is required and reporting best practices. Others are still looming in the background – providing little indication of how financial firms will comply or whether they will reach the point where safety switches will need to be flipped.

new thresholds trigger new requirements Throughout the crisis, AxiomSL has been surveilling the situation and monitoring liquidity reporting thresholds globally. Following is a rundown of some of the most prominent liquidity reporting requirements that are either being triggered presently or at risk of being triggered if the crisis continues much longer, along with a brief description of the reporting requirements associated with each.

• Basel III Alternative Liquidity Approach: Plunge into the depths of Basel III, and we will find a seemingly obscure provision outlining the eligibility for alternative liquidity approaches. The regulation was designed for financial institutions that have an insufficient supply of high-quality liquid assets (HQLA), also known as Level 1 assets, in their domestic currency to meet the demand of their specific significant currency exposures. In that scenario, banks are allowed certain alternative means of evaluating and recognizing Level 1 assets, such as from other currencies or elevations of Level 2 assets at higher haircut costs, when certain eligibility requirements are met.

Originally intended to address situations in developing nations where lining up liquid collateral to support significant holdings or to support fledgling entities can be a challenge, the uncertainties and liquidity shortages caused by the COVID-19 crisis have triggered such treatments for many mature and well-funded financial institutions.

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• Stress Testing: Daily stress testing has become a fact of life for many financial institutions during the COVID-19 pandemic. While Dodd-Frank mandated biannual stress tests for U.S. banks with $50 billion or more in assets, the new strains presented by COVID-19 have prompted several jurisdictions to issue mandates requiring systemically important financial institutions (SIFIs) to conduct daily stress tests.

These include COVID-19-specific stress scenarios – many of which had to be developed on the fly – and, even in cases where daily stress testing is not mandated, many financial institutions are doing it anyway to forecast potential impacts more accurately.

• Daily FR 2052a and Liquidity Coverage Ratio (LCR) Reporting: The U.S. Federal Reserve Board’s 2052a report, submitted by 39 of the largest U.S. and foreign banks operating in the U.S., captures certain directed (of interest) significant reporting entities and the consolidated institution’s assets, liabilities, cash and collateral inflows, and outflows for all maturities. It contains granular data on all defined products and provides a detailed snapshot of a firm’s liquidity risk position. The Fed continuously monitors the submissions to gain insight into the strengths and possible weaknesses of each firm’s liquidity position and to judge systemic liquidity risk that could require the Fed to step up support.

• Within the 2052a report, the Fed measures LCR, a Basel III liquidity compliance measure that compares a firm’s HQLA to its net cash outflows over a 30-day period. The twelve global systemically important banks (G-SIBs) report 2052a daily, T+2. The rest of the 39 have historically reported monthly, but the severe market stress caused by the COVID-19 pandemic has prompted the Fed to ask them to begin reporting 2052a daily, with some starting out weekly for a month. It can be a huge challenge for the new daily reporters to pipe their source data into regulatory reporting systems daily, as opposed to aggregating and reporting monthly.

getting ready for the known unknowns The liquidity reporting challenges associated with the COVID-19 crisis manifest themselves across a financial institution. Disparate teams working in different parts of the firm – and doing so remotely from their home offices – need to be able to collaborate to quickly identify thresholds that are at risk of being breached and the source data that will be needed in the reporting process. These teams must be able to pipe the data to the appropriate global authorities on the prescribed timeframe, in many cases daily.

It is no small feat to juggle the operational and technological requirements associated with this global liquidity monitoring and reporting challenge. Fortunately, technology can help automate large swaths of this process for firms that see the ‘known unknowns’ coming and put solutions in place to manage them – before it is too late.

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author Don Mumma Managing Director, Risk Management, AxiomSL Don Mumma oversees the risk management practice at AxiomSL. Prior to AxiomSL, Don spent 20 years as a financial services executive, market participant and risk management specialist with JPMorgan Chase, Credit Suisse and Toronto-Dominion Bank, where he spearheaded its entry in the US market.

Don holds a B.Sc. in finance from Miami University and an M.B.A. in finance from Ohio State University. He is an active member of a number of several professional organizations including PRMIA, GARP, and IAFE.

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capital planning in COVID-19 economy – closer look on the U.S.

by Piotr Buzala introduction In the aftermath of the 2008-2009 financial crisis, stress testing became a required business as usual exercise for the large U.S. banking institutions1. It is mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and is known as Comprehensive Capital Analysis and Review (CCAR) / Dodd-Frank Act Stress Test (DFAST). CCAR/DFAST test assumes both banks own internally designed (i.e. reflecting bank own and unique risk profile and vulnerabilities) and hypothetical developed by the Federal Reserve Board (FRB) macroeconomic and financial market scenarios and is built on projected revenues, expenses, reserves, and capital over the horizon of nine quarters. Scenarios are split into a “baseline” and a “severely adverse” types. This exercise ties the results of the test into the banks’ planned capital distribution actions and evaluates capital planning capabilities.

Paramount importance is paid to the “severely adverse” scenarios, which one of the goals is to remind the market participants that economic shocks exist. It serves as a requirement for the banks to be prepared from capital perspective for a highly recessionary scenario. In addition, from this year it provides the FRB a basis for the stress capital buffer (SCB) determination – a capital measure introduced and adopted in March 2020 capital rule effective from the beginning of October 20202.

stress capital buffer SCB is a firm-specific capital add-on that incorporates the FRB-modeled stress test results into capital requirements. A firm’s SCB requirement is calculated as (1) the difference between the firm’s starting and minimum projected common equity tier 1 (CET1) capital ratios under the FRB severely adverse scenario, plus (2) four quarters of planned common stock dividends as a ratio of risk-weighted assets.

In effect it is forcing banks to commit capital against a year’s worth of dividends as forecasted under internally developed baseline scenario.

1 / There are 34 firms participating in CCAR/DFAST 2020 process. The CCAR/DFAST results are to be released by the end of June 2020 and were unknown as of time of writing this article.

2 / https://www.federalregister.gov/documents/2020/03/18/2020-04838/regulations-q-y-and-yy-regulatory-capital-capital-plan-and-stress-test-rules.

3 / The CET1 may include as well countercyclical capital buffer (CCyB) which as of time of writing this article was set as zero.

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Figure 1 Common equity tier 1 (CET1) components3 for global systemically important banks (GSIBs)

Source: Draft to final rule regarding the stress capital buffer, https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200304a1.pdf, p. 7

Assuming that a firm’s CET1 ratio declines in supervisory severely adverse scenario from 11.5 percent to 8 percent, that firm’s SCB would be the greater of 2.5 percent or the 3.5 percent decline, in this case it will be 3.5 percent. Assuming further that this firm is a GSIB with a surcharge of 3 percent, the firm CET1 ratio requirement would be 11 percent. The 11 percent figure is the sum of the 4.5 percent minimum common equity tier 1 risk-weighted capital requirement, the 3 percent surcharge, and the 3.5 percent stress loss as calculated in the annual stress test. Post stress value (11 percent) would be close to pre-stress value (11.5 percent) in this case.

SCB replaces the 2.5 percent capital conservation buffer (CCB) as a component of the firm’s point-in-time capital requirements. Banks are now to maintain capital above the total of their regulatory minimum (min. 4.5 percent), their SCB (min. 2.5 percent), and their global systemically important bank (GSIB) surcharge (which varies in a range of 1-3.5 percent) if applicable. According to the impact analysis, under new buffer GSIBs capital requirement would have increased on average by $46 billion based on CCAR/DFAST results from 2013-2019. For the remaining firms subject to CCAR/DFAST, impact was on average a decline of $35 billion based on the same results4. Therefore, the overall increase to industry capital requirements is expected.

However, for large banks but GSIBs offsetting relief is expected coming from ‘easing’ assumptions for distributions (limiting from nine quarters to four quarters of dividend commitment) and balance sheet (flat balance sheet instead of balance sheet growth assumption). Peak-to-trough declines will likely be lower than in prior CCAR/DFAST resulting in capital relief for all other banks.

4 / WSJ May 19 - U.S. Slows Hiring of Chinese Nationals by Chip Makers - Link

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COVID-19 economy outbreak and capital planning It is worthwhile to highlight at least three items: Firstly, the aggregate banks CET1 at the end of 2019 was at the level of 12 percent. For the large firms (with assets above $100 billion) the ratio in aggregate declined from 11.5 percent at the end of 2019 to 11 percent at the end of the first quarter of 2020. Strong growth in risk-weighted assets (RWA), the denominator of the CET1 capital ratio, was driving lower capital ratios. The increase in RWA was a result of an abrupt increase in lending in the first quarter. A major portion of the growth in bank loans came from a drawdown of existing loan unused commitments as a response to COVID-19 lockdown. Some market research even suggested that short term lending impact might be up to 3 percent for top 25 banks5. With continued FRB actions supporting the flow of credit to households and businesses, including the Main Street Lending Program, further increase of the bank’s assets is expected. This is contradictory to severely adverse scenario balance sheet assumption under new rule, i.e. the assumptions that balance sheet remains constant over the planning horizon.

Secondly, FRB severely adverse hypothetical scenario was released mid-February 2020, at the time COVID-19 started to be considered as a major risk factor but the U.S. economy was still in the outlook of modest growth. Hypothetical FRB severely adverse for the domestic market assumed immediate (i.e. starting from the first quarter of 2020) recession lasting up to third quarter of 2021 with real GDP falling to almost 10 percent in second quarter of 2020 and unemployment reaching maximum level of 10 percent in the third quarter of 2021. From the fourth quarter of 2021 the U.S. economy is expected to rebound.

However actual unemployment in the U.S. in the first quarter of 2020 reached almost 15 percent, much higher than hypothesized. Though real gross domestic product (real GDP) decreased by around 5 percent in the first quarter of 2020, drop in the second quarter of 2020 due to economy lockdown is expected to be more painful, with consensus estimates being at the level of 30 percent or more on annualized basis. The forecasted second quarter drop is significantly higher than expected in adverse scenario.

Thirdly, in the first quarter of 2020, large U.S. bank earnings declined sharply, some of them by 50 percent compared with the first quarter of 2019. Lower earnings were driven by higher loan loss reserves stemming from implementation of the new current expected credit loss (CECL) accounting standard6. Though the impact of the CECL accounting standard on the capital requirements was delayed7 that means that regulatory capital might diverge significantly from accounting capital (i.e. current year or retained earnings).

5 / https://www.moodysanalytics.com/-/media/article/2020/unfunded-commitments-capital-impacts-in-a-crisis.pdf.

6 / CECL requires firms to account for future expected losses, as opposed to the previous Allowance for Loan and Lease Losses (ALLL) incurred loss methodology.

7 / https://www.federalreserve.gov/supervisionreg/srletters/SR2009.htm.

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synchronized and efficient planning is crucial “Baseline” scenarios from early 2020 are not any longer current scenarios. Even “severely adverse” scenarios might be overoptimistic, at least judging from the short-term U.S. economy performance perspective.

Considering that fact and having in mind industry balance sheet abrupt growth in the first quarter of 2020 and new lending programs, banks might be required to revisit their planned capital actions.

Under a new capital rule, banks are expected to know their capital positions in order to be able to apply the stress capital buffer requirement within two-day adjustments process of receipt of notice. Banks should assess as well whether its planned capital distributions are consistent with the distribution under the internal baseline scenario.

Under COVID-19 outbreak banks are busy revising their business targets/budgets under the new recessionary outlook. Banks should be as well re-running their own models in order to re-produce their own baseline projection so that the capital plan under outlook mirrors expected performance of their own internal financial planning capabilities.

This year the FRB granted relief from mid-cycle stress testing, but it looks that nowadays planning under COVID-19 has become a more frequent, immediate, and challenging exercise. There will be more scrutiny from the FRB on how fast and how well banks are able to re-baseline projections. FRB might be interested as well to see how various planning processes and their outcomes fit together.

author Piotr Buzala Piotr Buzala is a Senior Vice President in Citibank Europe plc a subsidiary of Citigroup. In his current role he is responsible for model validation for qualitative approaches, including those used in CCAR/DFAST. Prior to that he worked in product control area. Piotr has a PhD degree in Finance from Warsaw School of Economics and a Master degree in Spatial Economics from Warsaw University of Life Sciences.

This article presents the author’s personal view.

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the insurance industry and risk managers are poised to ensure the future

by Teresa Chan What kind of phone did you have ten years ago, in 2010? Could it warn you of virus exposure, allow you to remotely secure your home, or enable a virtual underwriting of your business for property insurance?

Within ten years, these capabilities will be obsolete and surpassed by virtually endless possibilities: selfdriving cars, private excursions into space, and even apps that predict and mitigate health problems in your future. Risk management professionals support the enterprises that will lead these advancements, and the insurance industry will be their partner in making it happen.

Insurers are always in the search for first-in-market innovations and versatile strategic solutions that can impact entire industries. Some of the key elements for success are a concerted corporate-wide effort, systematic outreach to clients and business partners to generate a pipeline, and critically, timeliness. While working in niche market development, I had the unique opportunity to launch the first personal and corporate identity theft products, build businesses for struggling communities, help secure financing for solar, wind, waste-to-energy, and biofuel projects, and create digital insurance platforms.

However, risk profiles constantly change and even ground-breaking solutions can quickly become obsolete. The fear of personal and corporate identity theft has been trivialized by the consequences of cyber-attack. As the reliance on and reliability of renewable energy grew, the responsibility of sustainability relative to environmental, social, and governance factors expanded beyond the clean energy producers who were insured. Traditional sales and marketing are no match for data analytics and machine learning. As evidenced by the pace at which technology has evolved over just the past 10 years, change takes place much faster now than it did before. As a result, risk management professionals and insurance providers must stay ahead of the curve by (1) increasing collaboration between stakeholders, including risk managers, providers, and intermediaries and (2) investing in human capital that is prepared to lead, facilitate, and foster innovation.

COVID-19’s reach is deeper in impact and broader in scope than anything we have experienced in modern times. As a result of the necessity for stakeholders to regroup and reposition themselves, there are opportunities to accelerate change and innovation together as we move forward. • Insurance providers should continue to deepen understanding of their insureds’ businesses and motivate them to be more tactically prepared to weather seemingly inevitable future COVID-like situations.

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• The upstream and downstream reliance of businesses on each other has been magnified, and it is an opportune time to map out these relationships for risk transfer opportunities. Risk managers and insurance providers can strategically benefit from this exercise.

• Financial markets may seek clients who can demonstrate more elastic business and risk management plans that could be supported by insurers. Perhaps a policy can be constructed to help small businesses manage unexpected operational pivots under specific conditions, like those who retrofitted their manufacturing facilities to produce alternative products.

• Insurance and other intermediaries with consulting practices can support risk managers with advisory services that complement new strategies in risk management. They can facilitate increased collaboration with carriers to produce new risk transfer solutions.

• Since business interruption coverage has made the headlines, more people understand it better now than before, whether or not they’re business owners. It highlights the gaps in knowledge about how insurance works, so enabling broader education about insurance will help elevate the critical role of insurance in every facet of life and industry.

Insurance is being transformed by disruptive forces like new technology, climate change, and abundant data. The industry embraces disruption, but the accelerated pace of change creates a human capital challenge. Insurance providers are more actively involved than ever in attracting and nurturing thought leaders who want to understand the business at a holistic level and be able to work collaboratively to achieve growth through new or improved products and services. Current circumstances yield even more opportunity for innovation than ever before, making modern educational and informational options a timely resource.

Consider this: The U.S. Bureau of Labor Statistics projects that as much as half of the insurance workforce will begin to retire in 10-15 years. An estimated 1.7 megabytes of data are generated each second of every day for every person, according to market intelligence firm IDC. And last year, investments in InsurTech businesses exceeded expectations with investors committing more than $6 billion, according to Willis Towers Watson. That’s more than a 60% increase in funding over the previous year. What does this mean?

It means that the industry needs a fresh crop of leaders and professionals who are tech-savvy, curious, and resourceful. It means that businesses have confidence in the insurance industry as game changers and not as insulated, static institutions. Ultimately, it means that the next generation of insurance professionals can be the ones to ideate and implement broad shifts in business strategies. Risk managers can tap these new resources as they emerge, eager to identify new markets, satisfy new customer needs and provide higher levels of service.

Through the optimization of risk and insurance communities’ relationships complemented with crossdisciplinary education, there will be a new level of transparency available to more risk and insurance professionals. Those who have a deep understanding of how all of the multidisciplinary, cross-functional units within an insurance enterprise work together will be able to achieve a better alignment of interests between insureds and providers.

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The confluence of professional studies with scholar-professionals in academia will fast-track the experiential learning process and help facilitate innovation while complementing in-house corporate learning and development initiatives.

New insurance leaders will eventually transform insurance business management, blending advanced industry knowledge, strategic and operational expertise, and an appetite for turning disruption into profitable innovations. They will have a unique perspective on the value of networking and the integration of these relationships to deliver value-added solutions for their clients. This new level of collaboration will provide extensive opportunities for risk managers and insurance providers to ensure the future together.

author Teresa Chan Columbia University School of Professional Studies Academic Director, Master of Professional Studies in Insurance Management With over 27 years of experience in the insurance industry, Teresa Chan is a recognized leader and innovator in the areas of renewable and alternative energy, niche market development, and policy drafting. Throughout her career, she has tackled emerging issues by building and leading multi-disciplinary teams and delivering client-focused solutions.

Most recently, Chan served as Business Manager for an insurtech business incubator supported by Willis Towers Watson. Previously, Chan spent 22 years at AIG, where she served as both Senior Vice President of AIG Energy Warranty and Director of Corporate Product Development.

Chan earned her J.D. from Fordham University and her B.S. in Operations Research from the School of Engineering and Applied Science at Columbia University. She has been recognized by publications including “25 Women to Watch” in Business Insurance and “Top Insurance Women” in ReActions Magazine.

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COVID-19 and libor transition: taking a market-led approach

by Navin Rauniar The ongoing COVID-19 pandemic has caused severe market volatility globally. Despite this volatility, the US Federal Reserve, Bank of England (BoE), and the Financial Stability Board (FSB) have reiterated their stance on firms not relying on LIBOR post December 31, 2021. This article examines regulatory pronouncements regarding COVID-19 impacts on LIBOR transition plans and recommends how financial institutions must continue LIBOR project execution, in parallel with their business-as-usual activities.

recent regulatory statements There has been a raft of regulatory statements across the financial services industry. While regulatory initiatives such as the Standard Approach to Credit Risk (SACR) and the Fundamental Review of the Trading Book (FRTB), et al. have been delayed (see Table 1), the elephant in the room is the LIBOR transition where the original implementation deadline of January 1, 2022, remains unchanged.

Table 1: Revised Timelines for Upcoming Regulations Amid the COVID-19 Pandemic

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Regarding LIBOR transition, the Financial Conduct Authority (FCA), BoE, and the members of the working group on Sterling Risk-Free Reference Rates (RFRs) have issued several statements on the impact of the coronavirus pandemic on banks’ LIBOR transition plans, which reiterate the unchanged dates: • “...end of 2021…should remain the target date for all firms to meet.”

• “...preparations for transition will be able to continue. There has, however, been an impact on the timing of some aspects of the transition programmes of many firms”.

• “All new issuance of sterling LIBOR-referencing loan products that expire after the end of 2021 should cease by the end of Q1 2021.”

Meanwhile, the Federal Reserve Alternative Reference Rates Committee (Fed ARRC) has acknowledged similar target dates for USD LIBOR and recommended the following transition milestones: Table 2: Recommended USD LIBOR Transition Milestones

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impact of COVID-19 volatility on LIBOR transition The COVID-19 volatility in March 2020 impacted rates products across the financial sector. Several global currencies with a Forward Rate Agreement (FRA) based on 3M LIBOR-OIS (overnight index swap) spread, are seen by many as a proxy for risks in the banking sector. The OIS is effectively the RFR. The USD FRA-OIS spread significantly widened in March, proving the criticality of LIBOR and its use as a proxy to ascertain funding, term premium, bank credit, and overnight rate risks. The excessive widening of the basis in stressed times is one of the main reasons behind the move to replace LIBOR. With Fed Funds at near-zero levels and 3M USD LIBOR at an all-time high, at the end of March 2020, driven mainly by increase in CP/CD and “expert judgement” rates (see Table 3), the basis significantly widened.

Table 3:3M fixed bank CP/CD transactions’ matched spread to OIS (bp): 3ML-OIS (bp)

While funding pressures have now been addressed by global central banks, institutions are currently analyzing the basis to understand impacts now on the ISDA fallback rate that will form the spread over the RFR which, in the case of the US, is the Secured Overnight Financing Rate (SOFR) rate.

The impact on SOFR is at a critical turning point. Despite the COVID-19 crisis, SOFR is not exhibiting the volatility seen in LIBOR rates. While repo markets are not showing funding stresses seen in the past (such as the September 2019 SOFR spike), SOFR was trading at a stable 6bps as of end May 2020, then falling to 1bps as of mid-July, driven by liquid overnight repo markets for US Treasuries.

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what financial institutions must do Given the volatility caused by COVID-19, financial institutions need to reassess several aspects that are intrinsically linked, update their product and rates strategy, and link this to technology activities such as exposure dashboard analysis and legal contract management.

Rates strategy Considering the complexity of the transition and the need to understand institutions’ exposures, product inventory, and client cohorts, a rates strategy should be developed. Given that RFRs such as SOFR and SONIA are at near-zero levels, institutions will be aware that margins will need to be maintained, especially in a low interest rate environment with capital management constraints.

In parallel, with looming negative rates being priced in by the market (see Table 4), institutions are finding the ALM process being impacted where existing liabilities are priced with credit sensitive components such as LIBOR, which now need to be potentially decoupled.

Table 4: OIS Curve sourced from Bloomberg 26/5/20

ALM mismatches need to be managed carefully, as credit spread sensitivity is not incorporated into RFRs. In response, the Fed panel overseeing the LIBOR Transition announced in May 2020 that alternative rates which are IOSCO (International Organization of Securities Commission) compliant can be explored in parallel to SOFR. Rates with unsecured and credit sensitive characteristics such as the American Interbank Offered Rate (AMERIBOR) and the Intercontinental Exchange Bank Yield Index (ICE BYI) are now serious contenders to SOFR if they fit the Fed’s definition.

When interest rates eventually rise, institutions will have to adjust their spread above the government cost of borrowing to factor in the risk of borrowing. Banks must use the LIBOR transition to establish an institutional rates strategy and incorporate this into their ALM, FTP (funds transfer pricing) & CoF (cost of funds) policies.

Exposure dashboard analysis Institutions will need to analyze the change in exposures per asset class and clearly demarcate the back book (trades maturing prior to December 2021) and front book (trades maturing post December 2021).

Given that institutions and their clients will be at different points in the transition for each currency, there will be instances where LIBOR related exposures increase, as RFR markets are still not liquid across the full curve. This should be closely monitored by management, and LIBOR-related exposures should be discouraged.

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Product strategy Institutions must reassess their product inventory to understand the impact of COVID-19 volatility and LIBOR-RFR movements on performance. Categorizing by product complexity, each product subset will need to be analyzed to understand the impact on desk and enterprise metrics.

The transition is further complicated by products using an assortment of conventions per RFR. Moreover, the absence of a standard convention (compared to LIBOR’s simplicity) increases the complexity of technology implementation, the parallel run for products, and the calculation of key metrics.

Legal contract management Given that LIBOR is a rate that has been in use for 40 years, it is critical that financial institutions appropriately tailor their client outreach by segments. Segmenting the client base will help draw up a systematic transition plan that benefits clients as well as financial institutions. With clients accessing emergency funding through the US CARES act, it is vital that institutions are clear on this mapping to ensure their clients understand the rate being written into their contracts, including the respective spread or fallback when LIBOR cessation materializes.

looking ahead LIBOR transition programs are evolving in the pandemic; they require a high degree of agility to respond to ongoing market and regulatory updates. Institutions may not be able to address all concerns immediately.

To ensure an orderly transition, financial institutions must: • Engage with their boards and update their strategy.

• Analyze COVID-19 impact on scope and plans.

• Communicate updated deliverables with new timelines.

• Utilize governance to engage across the organization.

• Prioritize key deliveries across the technology stack.

author Navin Rauniar Navin Rauniar is a Partner at TCS where he runs the LIBOR Transition globally for buy side and sell side clients. Prior to joining TCS, Navin worked in investment banking for over 15 years. Navin is also a Steering Committee Member for the PRMIA London Chapter.

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IBOR transition: implications of COVID-19 on spread adjustments from a conduct risk perspective

by Maximilian Beckmann, Stefan Wingenbach, Peter Woeste Christensen spread adjustments under the isda fallback approach ISDA has played the central role in developing the framework to end LIBOR. A long and transparent process has resulted in a seemingly simple approach. The LIBOR benchmark will be replaced by an Adjusted Reference Rate (ARR) plus a fixed Spread Adjustment. Usually, the ARR is the compounded risk-free rate (RFR). The spread adjustment reflects a compensation for risk premiums embedded in LIBOR compared to a risk-free rate.

The spread adjustment is fixed by ISDA and Bloomberg on the day the cessation is triggered by either the benchmark administrator or another competent authority. The fixing of the spread adjustment relies on past fixings only. No market data or other forward-looking information is used in the determination.

Market participants with LIBOR exposure maturing after 2021 are all exposed to the fixing of the spread adjustment. COVID-19 triggered market uncertainty has caused a sharp increase in the risk premiums embedded in LIBOR. Banks now have the following challenge: what is the right transition approach and how to advise clients on it during the course of the transition?

ISDA approach: details of the methodology The fallback approach embedded in the 2006 ISDA Definitions has three central aspects.

1. Adjusted Reference Rate: Which rate will replace LIBOR? 2. IBOR Cessation Trigger Date: When is the Spread Adjustment fixed?

3. Spread Adjustment: How is the Spread Adjustment calculated?

The Adjusted Reference Rate (‘which rate’) was determined by ISDA in 2019 and for each LIBOR it represents the RFR in the respective currency.

The timing (‘when’) is determined by the so-called trigger event. This is either a ‘cessation announcement’ or a ‘non-representative’ determination of the benchmark.

The spread adjustment between LIBOR and the adjusted reference rate is calculated and fixed as of the IBOR cessation trigger date. In July 2019, ISDA announced that Bloomberg Index Services Limited (BISL) would be the adjustment service vendor to calculate and publish spread adjustments related to fallbacks under the 2006 ISDA definition.

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Nine months later, on April 22, 2020, BISL published the detailed rule book1 on how spread adjustments will be calculated using the ISDA fallback approach: The spread adjustment for a specific IBOR is calculated as the median of the daily spreads between the corresponding IBOR and the ARR. The adjusted reference rate (ARR) corresponds to the backward-looking compounded RFR in the respective currency, determined ex-post in relation to the interest period of the IBOR. The observation period comprises a 5-year period ending one, three, six or twelve months in the past, depending on the tenor of the IBOR. According to ISDA, the publication of indicative fallback rates will start from mid-2020. The final spread adjustment will be fixed on the IBOR Cessation Trigger Date, most likely the date when the benchmark administrator announces the end-date of IBOR publication.

Despite several COVID-19 related shifts (including the CCP discounting switch for EUR-Derivatives2 or the targeted end of new GBP-LIBOR-business), FCA has reconfirmed that they do not intend to prolong support for the LIBOR panel beyond the end of 2021.

impact of COVID-19 economic crisis on spread adjustments, using the sterling market To provide a tangible example, we assume that ICE, as the benchmark administrator of LIBOR, announces the end-date of IBOR publication on January 04, 2022. Then, more than 70% of the 5-year observation period has passed already until June 2020. Therefore, current market developments in the wake of the COVID-19 crisis only have a limited impact on the fixed spread adjustment (see below).

Figure 1. Spread adjustment in case of a cessation announcement on January 04 2022

Chart 1: Timeseries of the daily GBP LIBOR/SONIA (ARR) Spreads and the resulting Median

Hence, due to the selected statistical measure (median), a range for the final spread adjustment can be derived from the realized time series until today. Based on a typical 3-month GBP-LIBOR (assumed spread adjustment fixing date January 04, 2022), the final spread adjustment will be roughly between 7 and 15 bps (see below).

1 / https://data.bloomberglp.com/professional/sites/10/IBOR-Fallback-Rate-Adjustments-Rule-Book.pdf 2 / Eurex (and LCH) decided to postpone the Discounting switch by five weeks to July 27, 2020

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Figure 1. Spread adjustment in case of a cessation announcement on January 04 2022

Chart 2: Calculation of the bandwith of the spread adjustment (Median of (daily) LIBOR/SONIA-Spreads)

If the IBOR cessation trigger date occurs earlier, an even higher fraction of the relevant time series is known and the bandwidth for the fixed spread adjustment decreases accordingly. In the case of an immediate ‘cessation announcement’ triggering the fixing of the spread adjustment, the current spread adjustment would be approximately 12 bps.

market approach: current basis spreads Looking at the traded spread between 3-month GBP-LIBOR and the 3-month SONIA, we see a sharp increase in March to over 60 bps. Until May 14, 2020, the spread decreased to approximately 28 bps.

This is still well above the possible maximum spread adjustment, derived under the assumption of a LIBOR cessation on January 04, 2022 (see above).

Chart 3: Spread between 3M-GBP-LIBOR and 3M-OIS (SONIA), Bloomberg 14th May 2020

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While BoE’s March cut in interest rates of 65 bps was fully reflected in SONIA, GBP LIBOR did not respond to the rate cut to the same extent. The reason is clear: LIBOR contains liquidity and default risk premiums not reflected in the risk-free SONIA. CDSs reflect the higher risk premiums accordingly.

Looking at the spread of long-dated basis swaps, we also see a widening in the course of the COVID-19 crisis - however, much less compared to spot spreads. The chart below shows only an 8 bps widening from mid-February to mid-April for the 10-year basis swap compared to more than 50 bps for the 3-month spread.

Chart 4: 10-Year GBP-LIBOR/SONIA basis swap, Bloomberg 14th May 2020

The pricing of the long-dated basis swap depends on different factors. Without the upcoming end of LIBOR, such a swap would typically exhibit a smaller increase in the spread compared to short-dated swaps. This is due to the typical mean-reverting behavior of basis spreads.

Currently, the main pricing component in the long-dated basis swap is the expected spread adjustment.

Once the fallback is triggered, the basis swap would become a SONIA-SONIA swap paying a fixed spread until maturity. Therefore, the spread movement of long-dated basis swaps can be decomposed into two factors: the spread change of a shorter basis swap until the anticipated IBOR cessation trigger date and the anticipated IBOR cessation trigger date itself.

As a result, information about the anticipated IBOR cessation trigger date can be derived from traded market data. We will further elaborate on that in one of our next papers.

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conduct risk due to different spread adjustments Bilateral legacy transitions from LIBOR to RFRs prior to a cessation event are highly recommended by Working Groups and other stakeholders. However, it requires a commercial agreement and finally the determination of a (fair) adjustment spread. The methodology for determining the adjustment spread leads to big economic differences depending on whether a conversion is based on: a. The ISDA approach (indicative spread adjustment published by BISL from mid-2020) b. An interpolated market approach (current market quotes for spreads) c. A value-neutral approach (spread is determined implicitly in the pricing) The benefit of the first two options is that the adjustment spread can be established using a “neutral� approach based on public fixings. It is fair to assume that all approaches will converge over time, if the market establishes a consensus that the cessation is inevitable and if that date approaches.

Chart 5: Schematic convergence between BISL spread and market spreads

In many real-world situations, it will be difficult to determine the fair adjustment spread without using a financial model to account for characteristics of the underlying transactions such as amortizing schedules or broken dates.

The fact that xVA considerations influence the NPV adds further to the complexity. Therefore, in many situations, the bank will have an information advantage over clients and counterparts who do not necessarily negotiate on equal terms. The larger the differences between alternative methodologies, the higher the litigation risk. Therefore, recent market developments have contributed to an increased litigation risk.

Even a fair amendment from LIBOR to RFR plus spread will result in different day-0 cash flows. This is due to the difference between spot and term spreads. Depending on the transaction side of the client, an amendment could possibly lead to an initial advantage. This would clearly support voluntary transitions.

However, such a situation seems vulnerable to conduct risk in particular, as clients might be willing to lock in an initial advantage even if the adjustment spread is worse than the fair value.

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However, a main focus of the FCA in the context of the LIBOR transition is that “firms have taken reasonable steps to treat customers fairly”3. In order to ensure this and to mitigate corresponding conduct risks, appropriate processes including customer communication, documentation and reporting should be established for the transition of legacy LIBOR trades.

authors Stefan Wingenbach Senior Manager in the LPA Consulting Practice Stefan Wingenbach joined Lucht Probst Associates (LPA) in 2009. He has many years of experience in consulting in the financial industry with a strong capital market focus. As senior manager he is responsible in particular for projects on IBOR transition, Advanced Analytics and distribution in Corporate Treasury Sales. During his career, he gained experience at globally active financial institutions, especially in the DACH region. Stefan holds a Diploma in math & economics from the Philipps-University Marburg is certified PMP and CFA-Charterholder.

Peter Woeste Christensen Director in the LPA Consulting Practice Peter Woeste Christensen joined Lucht Probst Associates (LPA) in 2016. With more than 20 years of experience in the financial industry, Peter offers a unique combination of deep business understanding and a strong background in technology and IT project management.

Throughout his career, Peter has held senior management positions at banks, system houses and consulting firms.

Maximilian Beckmann Manager in the LPA Consulting Practice Maximilian Beckmann is Manager at Lucht Probst Associates (LPA) GmbH. As a member of LPA’s Consulting practice, he focuses on capital markets strategy and is currently working on topics related to IBOR transition. Prior to that Maximilian worked for a risk and capital management consulting boutique in Frankfurt and London.

3 / https://data.bloomberglp.com/professional/sites/10/IBOR-Fallback-Rate-Adjustments-Rule-Book.pdf

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COVID-19 impact and CBUAE’s response

by Aakash Ramchand Dil As the COVID-19 virus spreads across the globe, economic consequences will follow, both in the short- and long-term. To soften the coronavirus’ blow to the UAE economy and support UAE lenders, The Central Bank of the UAE (the “CBUAE”) has issued a number of communications, standards and guidelines as part of a relief package, pertaining to the following: • Targeted Economic Support Scheme (“TESS”) • Mortgage Loans • Capital Adequacy • Liquidity • IFRS9 • Expired Emirates ID / Visa Compliance

targeted economic support scheme (TESS) TESS was introduced as a ‘Zero Cost Facility’ against collateralizing CDs/ICDs, already in place with CBUAE to contain the repercussions of the COVID-19 pandemic, designed to facilitate the provision of temporary relief from payments of principal and/or interest/profit on outstanding loans for all affected private sector corporates, SMEs and individuals.

TESS is summarized as follows: • Effective from 15 March 2020.

• Clients entering the TESS program will temporarily cease payments of principal and/or interest/profit. Their facilities may be re-scheduled or restructured, typically without a loss of net present value. In some cases, additional credit lines may be offered.

• The TESS also states that the IFRS 9 staging for TESS clients will remain unchanged for the duration of the scheme. This is based on the presumption that most of those clients have not experienced a significant increase in credit risk by virtue of their eligibility for the scheme.

Initially, the maturity of TESS was 15 September 2020; however, the same has been extended from 15 September 2020 to 31 December 2020 in a subsequent communication from CBUAE.

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mortgage loans CBUAE issued a notice pertinent to Amendments to Regulations regarding Mortgage Loans, which directed that the Loan to Value (LTV) ratio for real estate was increased for first time buyers by 5%, in order to enhance the affordability of home purchases.

capital adequacy CBUAE also provided some relief towards banks’ capital adequacy by: • Segregation of retail and corporate SMEs, that attract 75% and 85% RWA respectively.

• Keeping the Capital Conservation Buffer (CCB) at 2.5%, but banks are allowed to tap into their capital conservation buffer up to a maximum of 60% without supervisory consequences, effective from 15 March 2020 for a period of 1 year.

• Additionally, the planned effective date of the remaining Basel III Capital Standards and related Guidance pertaining to CVA and SA-CCR has been moved from 30 June 2020 to 31 March 2021.

liquidity In April 2020, CBUAE issued a communication sharing new regulatory thresholds for the following: • Reduction in Eligible Liquid assets ratio (“ELAR”) requirement from a minimum of 10% to 7%.

• Reduction in Liquidity Coverage Ratio (“LCR”) requirement from a minimum of 100% to 70%.

• Reduction in Cash Reserve requirement on demand deposits by 50% to release liquidity into the banking system.

IFRS9 In April 2020, a Joint Guidance (CBUAE, DFSA and UBF) was released that proposes practical solutions to manage the impact of economic uncertainty on Expected Credit Losses, while remaining compliant with globally accepted financial reporting standards (IFRS).

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Excerpt of the proposed changes:

expired emirates ID / visa compliance In April 2020, a spokesperson for the Federal Authority for Identity and Citizenship publicly communicated that “all visas and entry permits expiring on March 1 shall remain valid until the end of December 2020”.

This communication of auto renewals has a direct impact on one of compliance related KRIs in any bank, i.e. customers with expired KYCs.

conclusion UAE’s banking industry understands that no industry or sector is immune to the current COVID pandemic.

Therefore, all of the banks have commenced providing appropriate deferral and/or debt forgiveness mechanisms to impacted borrowing customers, whereby principal and interest is are deferred for an appropriate period.

references • https://gulfnews.com/business/banking/covid-19-response-uae-banks-use-60-of-funds-under-central-bank-liquidity-facility-1.71170208 • https://www.moodysanalytics.com/regulatory-news/apr-05-20-cbuae-announces-relief-measures-to-address-impact-of-covid-19 • https://u.ae/en/information-and-services/justice-safety-and-the-law/handling-the-covid-19-outbreak/economic-support-to-minimise-the-impact-of-covid-19 048

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author Aakash Ramchand Dil Aakash Ramchand Dil a Senior Manager Market Risk and Capital Management at National Bank of Fujairah, Dubai, UAE. Prior to joining NBF, Aakash worked with SAMBA Bank Ltd, Union National Bank, Compono Strategia and Commercial Bank International on various risk management and BASEL implementation roles. He specializes in Risk analytics, IFRS9 ECL, Bottom-up stress testing techniques, quantitative finance and financial risk (Credit and Market) modeling. His research interests are in financial econometric stress testing, risk based pricing and ARMA modeling.

Aakash holds an associate diploma in Actuarial Science, a dual bachelor’s degree in Commerce & IT and a Master’s degree in Business Administration, as well as Leadership and Strategic management certificates from Harvard Business School and Said Business School, Oxford University.

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COVID-19: opportunities for the U.S. individual life insurance industry

by Varun Sood Do you think we are ever going do a handshake again? Or will we celebrate by blowing candles on a birthday cake? These common and universal practices might simply disappear from popular culture, never to be experienced again. These are just some simple examples of how COVID-19 will permanently alter social cultures and business practices.

The COVID-19 pandemic has already had a significant impact on almost every industry. While most of the sectors have been affected negatively, a few have seen a positive effect too. With millions of people infected across the globe, individual life insurance is one product which is directly related to the pandemic and is likely to have a major effect. The looming economic recession has forced every industry, including individual life insurance, to look for innovative ways of dealing with it. The way the pandemic scenario has been rapidly evolving, the changes in industry practices are going to be at a pace faster than ever witnessed before.

As per a recent LIMRA study based on the last 50 years data, individual life insurance policy sales have typically shown a decline during or immediately after a recession, but there have been exceptions driven by unique customer behavior like the recession in the early 1980’s when policyholders were replacing whole life insurance with universal life insurance in order to take advantage of the then highinterest rates.1 The impending severe economic downturn also has a unique characteristic that it is resulting from the fear of ill-health and death. There are some early signs that the fear of coronavirus is driving people’s interest in individual life insurance. The life insurance industry is expecting that this new concern about health threats as well as the increased adoption of the internet to access financial service will help them turn a negative scenario into an opportunity.

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accelerated underwriting Many life insurers have started using “accelerated underwriting� for at least some of their applications. This process uses data about the applicants and in some cases cuts the approval time down to less than a day resulting in instant-approval policies, where providers use algorithms and data to quickly process life insurance application information. Coronavirus has made common elements of life insurance underwriting, like in-person meetings and paramedical exams, difficult resulting in enhanced importance of accelerated underwriting which avoids the need for blood or urine samples and relies more heavily on data.

The background check for accelerated underwriting usually consists of verifying the medical and driving records. This is likely to expand and include travel data due to the evolving nature of risk. Even the information collected from the customer is expected to change with a new set of questions likely to be used especially around previous COVID-19 test results, recent travel history, and contact with infected people.

increased direct sales Life insurance historically used to be sold primarily by captive agents or independent agents. However, life insurance is now also sold directly and through the internet. While the share of direct sales channel has been increasing over time, agents still account for 90% of life insurance sales. Direct sales comprised 6% of the market in 2018, up from about 4% in 20092. The global pandemic is expected to accelerate this shift towards direct sales of individual life insurance policies especially through the web.

digitization of processes Individual life insurance policy sales used to involve multiple touchpoints which are likely to go away completely or reduce significantly. A major change which is likely to happen is that the face-to-face meeting with an insurance agent or wet signatures on a paper document might no longer be required and will be replaced by agents advising clients by phone, chat or video conference followed by electronic signature for documents and receiving of policies by email. This digitization of processes is not only going to reduce the Selling, General & Administrative Expense (SG&A) for the insurance carriers but also make the process much faster and smoother.

increased claims volume While most of the challenges related to COVID-19 will have long-term impacts, the count and monetary value of the unanticipated death claims that will come from this virus are the most immediate threat which presents an opportunity to streamline the claims operations by strategic triaging of the claims and straight through processing of the low risk claims.

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This will not only help in reducing the claims processing costs and time but also help the insurance companies effectively support the grieving families in these difficult times. Another major concern is that, with the high unemployment rates, the desperation of fraudsters has increased tremendously leading to amplified value of state-of-the-art fraud detection processes.

It is still early to draw conclusions regarding the ways and to what extent COVID-19 will transform society and the life insurance industry. However, we are already seeing significant signs of change across the industry value chain and post this pandemic, there are going to be some clear winners and on the other hand, companies which fail to adapt to these rapid changes might soon go out of business. It is imperative for the insurance carriers to understand the risks and fully capitalize on the opportunities presented by this crisis.

references 1. Coronavirus (COVID-19): The Impact of Economic Recession on Life Insurance Sales https://www.limra.com/en/research/research-abstracts-public/2020/coronavirus-covid-19-theimpact-of-economic-recession-on-life-insurance-sales/ 2. Facts + Statistics Distribution channels https://www.iii.org/fact-statistic/facts-statistics-distribution-channels

author Varun Sood Varun Sood is an Engagement Manager with EXL Service based in Madison, Wisconsin.

He has over 15 years of analytics consulting experience primarily in the insurance domain.

He has managed and led several large analytics engagements in areas like risk, fraud, collections, pricing, operations, and customer analytics for various large corporations across the globe. Varun holds a bachelor’s degree in Electronics and Communication Engineering from National Institute of Technology Kurukshetra and an MBA from Indian Institute of Technology Delhi.

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crisis fraud risk management

by John Thackeray introduction The crisis fraud risk management is born out of a highly volatile atmosphere which can upend and overwhelm even the most structured fraud risk management program. This volatile atmosphere is here with us today and comes in the form of COVID-19. COVID-19 represents the single greatest challenge to fraud risk management (“FRM”) because pandemics and their effects were never identified as a driving force in the escalation of both existing and new types of emerging fraud. Moreover, business continuity plans had an isolated focus on operations rather than people and operations, with much shorter timeframes envisaged.

“1In a new survey conducted by the Association of Certified Fraud Examiners (ACFE) about the effect COVID-19 has on fraud, 90% of respondents reported that they have seen an increase in scams targeting consumers, with 51% believing the increase has been by a significant amount. Respondents reported seeing an immediate increase in a number of specific fraud schemes. Of those surveyed, 75% said they already have encountered an increase in phishing through government impersonation, and 71% report seeing an increase in charity fraud. They also have experienced an increase in fraudulent vaccines, cures or tests for the coronavirus (66%); third-party seller and buyer scams on legitimate online retail websites (64%); business email compromise scams (62%); and cyberbreaches (61%). Link to survey: ACFE COVID-19 survey.”

pandemic effects There is no doubt that a Pandemic can cause economic and financial hardship on a massive scale both on an individual and corporate scale. In times of economic crisis, employees’ personal financial pressures tend to rise, which is often where the decision to steal and embezzle is rationalized. This justification can proliferate as many key individuals are wearing multiple hats with a dilution of segregation of duties. This rationalization extends to companies that face pressure to falsify their financials in order to meet earnings targets or secure and maintain financing. Constrained supply chains and reliance on key third party vendors may increase the incidence of bribery and corruption as the need to meet and support company objectives becomes paramount.

In this threatened environment, companies may seek to cut costs which will often target non-revenuegenerating departments e.g. compliance, internal audit, while at the same time reducing budgets for control training.

1 / Source Association of Certified Fraud Professionals.

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The lack of fraud assessments that are integral to a comprehensive anti-fraud program only serve to leave organizations more vulnerable to the growing likelihood of fraud. As organizations make cuts in the attempt to operate with a leaner staff, they can find themselves caught in a perfect storm for fraud: mounting financial pressures motivating employees and customers alike providing a common co-operative cause, fused with a highly toxic emotional, irrational and survival based mindset acting as a powder keg.

Social distancing from the virus has increased the online risk with fraudsters having already found ways to use coronavirus warnings as a veil for malware injections and other fraud schemes. Social distancing has meant the need and increased usage for contactless payments and with it a proliferation of social engineering attempts leading to an uptick in fraud in the space of e-commerce and online payments with an incessant increase in both identity theft and account manipulation. This increase in social engineering has escalated with the reliance on home office environments, which by themselves offer fraudsters the opportunities to both degrade and infiltrate organizations’ data and information systems.

response The first thing is to realize that such a crisis raises the vulnerability of the organization to fraud and is a true test of the fraud resilience of the organization. Outlined below are three countermeasures that the fraud risk program should adopt and introduce in the new challenging environment.

1. Re-evaluate and reassess fraud policy and procedures The existing FRM framework needs to be re-evaluated and reassessed knowing that a scan of the environment and the resultant ensuring pressures will create new emerging opportunities and stronger motives for the performance of fraud. The new normal will create new avenues as outlined above for the fraudster which may expose the soft operational underbelly of the organization. There may be a need to get ahead of the fraud curve and proactively amend and adapt the policy and procedures to reflect the new normal, e.g. a new fraud taxonomy. Existing policy and procedures that may now be compromised in terms of operational efficiency will have to be adapted in a timely fashion in respect to the redrawing of fraud risk appetites and tolerances, with greater insight and participation from stakeholders.

2. Review and renew the fraud control environment The external environment will be constantly updating and changing according to the political pressures of the day, with both public and private organizations offering different and varied responses, leading to potentially confusing messaging. Temporary legislation will create loopholes and opportunities with the need to constantly rethink the identification and assessment of likely fraud risks that can emerge due to exceptional management measures, especially in the short-term. Exemptions that have been granted by the authorities to existing policies and procedures resulting in a relaxation of controls should be documented for future reviews and audits.

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The external environment will be constantly updating and changing according to the political pressures of the day, with both public and private organizations offering different and varied responses, leading to potentially confusing messaging. Temporary legislation will create loopholes and opportunities with the need to constantly rethink the identification and assessment of likely fraud risks that can emerge due to exceptional management measures, especially in the short-term. Exemptions that have been granted by the authorities to existing policies and procedures resulting in a relaxation of controls should be documented for future reviews and audits.

3. Improve the fraud message, communication, and data channels As the crisis continues, there is a greater need to engage and communicate the fraud message without overloading the individual with information. Sharing experiences and observations is paramount and can act as an early warning system. Fraud Risk will be elevated in conjunction and heavily correlated with the increased incidences and risks of cybersecurity and anti-money laundering. Information flows to understand this triage of threats need to be on a timely basis and aligned in a coordinated fashion from internal and external data sources such as Compliance, Information Technology, Audit and Third-Party Vendors. The organization must understand the interconnectedness of fraud with all the other risks facing the organization and be able to respond at the enterprise level.

One result of the new working environment has meant information flows have increased as the number of whistleblowers who are now either disengaged or emboldened from working at home have decided to come forth. According to a recent Wall Street Journal article, the U.S. Securities and Exchange Commission received about 4,000 tips from mid-March to mid-May, which is a 35% increase 2 from the previous period last year. The whistleblowing hotlines mean that there is a readymade, low cost source and credible assessments that can be conducted providing the organization has the resources and resolve to investigate.

Fraud risk managers need to tailor their message to different audiences at a faster pace and need to be better communicators. Fraud communication needs to be reinforced and this extends to training needs, with the need to be creative, involving topics which are current, so the message is easily assimilated and on point. The importance of training needs to be emphasized and for once must be rigorously enforced with penalties for noncompliance.

With this information overload, fraud risk managers will have to provide clean, accessible, robust, and sustainable data with the need to keep vast amounts of data for future inspection and audit. The amount of big data being generated will enable the more astute to redesign their control processes using a comprehensive data management set of both public and private data sets. The data flows need to be treated in perspective with any anomalies explained with the number of false positives created by the increased data flow. Sanitization and regular inspection are a must to power the behavioral analysis which can detect those new and existing incidences of fraud.

2 / Steven Peikin, co-director of the SEC’s enforcement division quoted in the Wall Street Journal 1st Jun 2020

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Moreover, certain segments of the customer base will be more prone to high risks, and fraud investigators will have to employ key behavioral analysis to drive informed decisions on whether transactions are fraudulent or genuine. Machine Learning and Artificial intelligence will have to be woven into the fraud risk manager’s fabric, providing data analytics that can be used to understand device vulnerability and attacks.

These challenges will alter the role and responsibility of the fraud risk manager who will become data custodians, model risk managers and ad hoc technologists.

passing thoughts Crisis fraud risk management means that fraud risk managers must have an adaptable and credible plan and stay focused rather than become embroiled in the crisis themselves. The three countermeasures above offer insight and guidance to alleviate the vulnerability and mitigate the number of fraud incidences in a crisis.

author John Thackeray John Thackeray is the founder and CEO of Risk Smart Inc., a consulting firm that helps firms control their risks by writing polices, frameworks and procedures. John is an established risk thought leader and writer.

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embracing for a world post COVID-19 lockdown

by Vivek Seth The year 2020 is likely to be etched in our memories for a long spell of time across the globe. Right at the onset of this year when we were just over with new year celebrations, the world witnessed the outbreak of the COVID-19 pandemic. The infectious disease came as a surprise to governments and businesses across the world; by mid- May, it had already affected over 5 million people and resulted in over 300,000 deaths worldwide1, and these numbers are increasing further at the moment. While efforts are underway to create a vaccine that provides immunization against this newly discovered disease, many governments have taken a stand of imposing restrictions on normal business operations, trade, and travel. Corporations across the globe have implemented work from home measures on a neverseen-before scale to help contain the spread of the disease. Even nations that have not imposed such strict lockdown conditions have strongly advised their citizens to adhere with social distancing measures and best hygiene practices. Numerous countries have witnessed high mortalities, delays in key events like holding elections, Olympics & business events such as Expo 2020; some nations have unfortunately also experienced the second wave of pandemic spread. The global outbreak is clearly impacting the world at economic, social, and political levels at an alarming rate.

As the world is coming to terms with the extent of the pandemic outbreak, it is equally crucial to understand how the world is likely to operate once the pandemic spread has subsided and global lockdowns are over. Broadly speaking, we can expect to see the following trends, risks and opportunities arising out of COVID-19:

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Economical The International Monetary Fund in their April 2020 economic outlook 2 highlighted that due to the pandemic, the global economy is projected to contract sharply by negative 3 percent in 2020, a contraction even much worse than experienced during the 2008–09 financial crisis. It is anticipated that the pandemic containment effort will keep us busy throughout 2020, with possible spillover effects felt in 2021. Clearly, this trend will directly affect industries such as airlines, tourism, entertainment, however it is likely to indirectly affect numerous industries across manufacturing and service sectors. This impact is expected to be negative as financial market outlook, customer sentiments, and demand for goods for short and medium term are being forecasted to be below par when compared with pre-lockdown period.

According to the April 2020 report3 of Institute for Supply Management - known for its U.S. surveys, the largest economy is in its contraction stage across both manufacturing and service sectors. Similar economic observations are also felt across the world implying restructuring measures such as downsizing, reorganizations of business operations, automation of repeated tasks aimed at cost reduction and reskilling of workforce population will become the new normal across the globe. Companies that fall behind in adjusting to these belt tightening measures are likely to lose their customer & shareholder market to their agile competitors. This new era would also be an opportunistic moment for corporations to adopt more efficient ways of doing business at a faster pace such as wider usage of remote working facilities and online transactions and payments. Smarter governments will strive towards adoption of efficient fuel consumption and local supply chain facilities and push towards ecological friendly alternatives such as greater usage of solar and wind energies.

Political During this crisis, the world has witnessed different spectrums of geopolitical dynamics. Some governments have taken a rudimentary stance such as initially downplaying the seriousness of the pandemic, blaming other countries for the infection spread and refusing to acknowledge the weakness in their healthcare infrastructure. One such instance was when the U.S made the bold decision recently to halt funding to the World Health Organization citing WHO failed in its basic duty4. The fear of the pandemic spread is also being used by fundamentalist ideologists to blame it on minorities, immigrants, and low-income households as part of polarization of mass’s opinions. Such phobia is evident in news5 of irrational behaviors observed across the globe such as helping doctors & medical staff being physically attacked and chased away by mobs based on baseless rumors.

On the other hand, sensible nations have collaborated towards containing the infection spread via aiding one another on financial grounds, supply of healthcare items, and sharing of medical information on Coronavirus cases. WHO members are striving towards collaborating on accelerating the development, production and equitable global access to essential health technologies6. At the United Nations forum, world leaders, scientists, humanitarians and private sector partners have collaborated on making new tools and medicines to diagnose and treat COVID-197. Countries that work together towards this mutually beneficial common goal will emerge as more robust economies that will be more prepared when future pandemics strike.

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Nations with leaders that acknowledge we are all together in this pandemic fight will show faster recovery and restoration to normal status quo. Strong multilateral cooperation is essential to overcome the effects of the pandemic, especially in order to help third world countries that are constrained by funding shocks and weak health care systems. It is also an opportunity for these countries to upgrade and enhance healthcare infrastructure, their public healthcare funding and insurance policies so as to stay adequately prepared for next health crisis.

Social Post-lockdown, altered patterns of social behavior could be seen across the world on how we interact with each other, consume resources, and prioritize our personal goals. A lot of us may now prefer non-contact greetings, social distancing when in crowded places, and be more conscious of personal hygiene, thanks to global awareness campaigns circulated during this crisis. Staying at home during the lockdowns has also helped us appreciate better the time spent with family & friends; an average employee is likely to have more career expectation with regards to working from home and other work-life balance options. Having witnessed how a global pandemic halts daily routine of life, many of us will have more inclination towards job opportunities that provide self-fulfillment and contribute positively to the environment and society. The workforce would also be expected to upgrade their skill knowledge and credentials more frequently in order to stay viable and adapt to digitalization and corporate restructuring.

As a consumer, we are likely to prioritize how we spend our earnings, especially given the financial hardships that are likely to follow post-lockdown. During the crisis, we have refamiliarized to the idea of cooking at home, being entertained via online media platforms, and limited our travels. Our spending patterns on dining, leisure travel, large scale gathering is likely to be reduced in the near future. More awareness towards climate change and corporate social responsibility can be seen among common masses, than these topics limited to scientific communities.

conclusion The pandemic crisis that has perplexed us all with its unexpected arrival, exponential spread and global panic is expected to have economic, political, and social impacts in coming years. Apart from the imminent impact of sudden global shock and knee-jerk halt of world’s status quo, we now face the risks of contraction in international trade, increasing protectionism across nations and decline in morale at social masses.

Governments, business and societies that rise up to these challenges and strive towards the positive direction of adapting to changing economic environment, cross country collaborations and continuously upgrade their skill set; will emerge more robust, better prepared for future health and supply chain scare and successful in the long term.

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references 1. https://www.worldometers.info/coronavirus/ 2. https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020 3. https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm?SSO=1 & https://www.instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm?SSO=1 4. https://www.bbc.com/news/world-us-canada-52289056 (BBC News - “Coronavirus: US to halt funding to WHO, says Trump”) 5. https://www.bbc.com/news/world-asia-india-52151141 (BBC News -“Coronavirus: India doctors ‘spat at and attacked’”) 6. https://www.who.int/news-room/events/detail/2020/04/24/default-calendar/global-collaboration-toaccelerate-new-covid-19-tools (WHO - “Global collaboration to accelerate new COVID-19 health technologies”) 7. https://news.un.org/en/story/2020/04/1062512 (UN -“Landmark collaboration’ to make COVID-19 testing and treatment available to all”)

author Vivek Seth Vivek Seth is a Singapore citizen, with over 15 years of Compliance & Risk Management experience in Financial Industry. His work experience spreads across Singapore, Dubai and Australia along with business assignments carried out in Hong Kong and Switzerland. He holds an M.B.A. and also the PRM™ professional certification. This article presented here represents author’s personal views and not that of his current/previous employers or any professional bodies he is associated with.

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How do I lead in these turbulent times?

How can remote work help me and my business?

How do I communicate business plans amid uncertainty?

How should I handle difficult remote conversations with my customers and employees?

Uncertain Times Call for Trusted Facts.

PRMIA Sustaining Members have complimentary access to The Wall Street Journal. Become a member today at www.prmia.org

Š 2020 Dow Jones & Co., Inc. All rights reserved.

COVID-19: credit action plan for banks

by Elmarie Van Breda importance of banks to financial stability European banks have been enabled to assist their customers during the COVID-19 pandemic recession1. The ECB provided monetary stimulus2, and liquidity is being made available to banks through government debt funding support programs3. However, the changed definitions of default, materiality, and forbearance by the EBA4 establish more restrictive IFRS9 impairments. Thus, it is inevitable that there will be increases in expected losses (EL) affecting earnings and unexpected losses (UL) affecting capital allocation.

It is important to acknowledge that banks have to control the impact of COVID-19 because “financial stability hinges on the long-term profitability of banks”, according to Matthew Blake, The World Economic Forum’s Head of Financial and Monetary Systems5. The OCC is encouraging banks to use their capital and liquidity buffers as they respond to the challenges of the coronavirus situation.

However, it expects banks to continue to manage their capital allocations and liquidity risk prudently and recommends approaching minimum standards, e.g. 8% RWA capital and 100% LCR, rather than falling below6. Thus, it is important that banks have a COVID-19 credit action plan in place.

a pragmatic approach to uncertainty This plan needs to take a pragmatic approach in estimating EL and UL in an environment of tremendous uncertainty. The inputs to the portfolio approach normally used in credit risk management need to be adjusted to take borrowers’ changed circumstances into account.

1 / The COVID-19 impact on banks’ credit portfolio. Elmarie van Breda, May 2020. https://www.linkedin.com/posts/finrisk_covid-19-impact-on-banks-activity-6689423709712760832-zlRY 2 / https://www.ecb.europa.eu/home/search/coronavirus/html/index.en.html 3 / https://home.kpmg/ie/en/home/insights/2020/04/covid-19-government-debt-advisory-supports-disrupted-businesses.html 4 / https://eba.europa.eu/eba-publishes-guidelines-treatment-public-and-private-moratoria-light-covid-19-measures 5 / https://www.euromoney.com/article/b1lhw9gpg70smh/response-and-responsibility-banks-and-the-fight-against-covid-19?copyrightInfo=true 6 / https://www.occ.gov/news-issuances/bulletins/2020/bulletin-2020-17a.pdf

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Based on Figure 1, the aggregate impact of annual losses on banks is expected to be as follows7: 1. The area under the graph remains 100% loss, which will now be a bigger number, i.e. higher impairment provisions and capital requirements.

2. The line between Expected Losses and Capital will move to the right as bigger losses are expected. As the area under the graph remains 100% loss, this means that the curve is flattening, i.e. the probability of smaller losses is reducing relative to the increase in higher losses.

3. There could be some catastrophic losses - creating a fat tail on the right-hand side of the curve.

In the current climate, the impact on different industry sectors is very diverse, and the relief and stimulus being offered via banking products does not have the same credit risk impact per product. Thus, it is important that each bank’s credit portfolio be segmented by sector (S) and product (P); let us call this the SP(i)_Group, e.g. revolving loans (P) for the airline industry (S).

Within each SP(i)_Group, material exposures need to be identified, and each borrower with one or more material exposure needs to be managed individually. The balance of the exposures in the SP(i)_Group can be evaluated as a portfolio as usual; however, the input variables (PD, EAD and LGD) need to be updated, and stress tests need to be made relevant to current market conditions.

The credit department will have to decide how to deal with borrowers in the material exposure category and agree on the principles and methodology of how to approach each sector. One possible approach is described on the next page.

7 / FinRisk 2020: The Credit loss distribution. https://www.linkedin.com/posts/finrisk_credit-loss-distribution-activity-6689438200190029824-U-Ye

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revised approach for credit departments For borrowers with material exposures, the PD needs to be reviewed – liquidity measures like survival horizon will be a key metric. A pseudo LCR for corporates can also be used, e.g. liquid assets vs net cashflows for the next x days, x = number of days anticipated to next revenue.

The quantum, maturity date and cash flow structure of the loan will impact the EAD and thus changes and extensions to loans need to be carefully considered. A balanced approach is required to ensure the borrower has enough liquidity to survive the sector’s anticipated recession, but not so much debt that it will create solvency risk.

For LGD, each bank needs to approach its borrowers regarding mitigation and covenants, evaluating all collateral and guarantees for enforceability and reviewing liquidity haircuts.

Revised IFRS9 guidelines need to be followed, and migrations to lifetime loss EAD should be part of the EL calculations8.

Portfolio analysis needs to be done for all borrowers in the SP(i)_Group. New EL (IFRS9) and UL (RWA) need to be calculated using the new PDs, EADs, and LGDs.

stress testing and economic capital A restated baseline can be to use new contract cashflows (EAD) as already agreed with borrowers, restating PDs per sector but leaving the LGDs and IFRS9 stage unchanged.

For the stress tests, credit migration scenarios can be applied to PDs; behavioral and new business scenarios can be defined for stressing EAD. LGD can be stressed in line with market liquidity and reduced by taking government relief measures and newly negotiated mitigations into account.

Economic capital can be based on the results of the stress testing per SP(i)_Group, but credit limits need to be adjusted. There need to be SP(i)_Group limits and to reduce the aggregate limit, a headroom limit can be used which can be utilized temporarily by an SP(i)_Group when required.

This pragmatic approach will ensure that each bank can explain the drivers for its COVID-19 jump in impairments, credit risk capital and limits.

8 / Detailed guidance on the criteria to be fulfilled by legislative and non-legislative moratoria applied before 30 June 2020 https://eba.europa.eu/eba-publishes-guidelines-treatment-public-and-private-moratoria-light-covid-19-measures

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author Elmarie Van Breda Elmarie works globally in the banking industry and is currently director of FinRisk. She has held strategic leadership roles with Standard Bank and software vendors, leading diverse teams & clients with large geographic mandates in systems, improvements, risk management, data and mathematics. She is a Risk Management expert with knowledge in Credit risk, Market risk, IFRS9, ALM, Liquidity and an experienced architect in risk systems implementation. Elmarie is also an entrepreneur with 4 start-ups behind her. She holds a Computer Science degree from the University of Stellenbosch with post-graduate studies in Mathematical Statistics, Operations Research, and Financial Trading.

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how is your pandemic plan working with your vendors?

by Branan Cooper Until recently, a pandemic plan was still an obscure concept for most people, except perhaps an organization’s business continuity manager, information security staff, or the board who had to review it annually. That all changed earlier this year with the outbreak of the coronavirus. Suddenly, pandemic plans became a major concern, not as an obscure topic, but instead as an operational reality.

pandemic planning is (and always has been) a requirement Organizations may have been required to have formal pandemic plans for quite a while. The problem is, when is the last time an organization actually pulled it out, dusted it off and really thought about its implications?

As part of their overall third-party risk management process, many organizations go through the required perfunctory exercise of reviewing and approving their plans and vendors’ plans each year. It is doubtful that most contemplated a working world in which nearly everyone would be working remotely. Coupled with that, of course, is the reality of having school-age children, spouses and others competing for time and attention and perhaps, in many cases, even internet bandwidth.

remote work is becoming the norm, bringing increased security risks There are many challenges and increased risk that come with remote working. With most of – maybe all – your organizations’ data flowing freely to remote locations, how certain can you be of the security implications? Not just the online security, but the physical security as well. Do the employees routinely shred the materials they are printing and reviewing, particularly if it contains non-public personal information such as customer data?

Underlying all of this are the organization’s vendors. The old adage, “a chain is only as strong as its weakest link,” truly comes into play here. Even if your organization has a rock-solid approach to pandemic planning or has a great way of hardening its network, what about all the vendors? There could be hundreds, perhaps even thousands, of vendors involved, with many of their employees working remotely.

2 steps for vendor awareness during the pandemic There are two steps you should take to ensure proper vendor awareness during the pandemic: 1. Maintain an open line of communication and discuss expectations with vendors. It has never been more crucial than at this inflection point. Understanding their practices is vital, particularly to the extent that they are housing, distributing, transmitting, or discussing nonpublic information about your customers.

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2. Document the potential business impact that you anticipate. What steps are being taken to mitigate that risk, as well as any incidents that occur? Ideally, much of this type of planning has taken place long before any potential pandemic event occurs, but many organizations have treated this as a formality with a remote possibility, rather than an actual exercise to consider.

lessons learned Once this pandemic crisis is over, it is a good opportunity to get your team together and do the following: • Discuss what went well • Discuss what did not go well • Perform a gap analysis on items needing improvement • Discuss what should be implemented based on the learnings Perhaps you find certain vendors with whom you need a better understanding of their strategy, or perhaps, there is a need for better internal and external communications. It could mean employee training for both your organization and the vendor. Whatever the case may be, document the analysis well and assign individual accountability where necessary to ensure that actions are followed through before the next pandemic event occurs.

The lessons learned in times of crisis help us prepare for the next one and provide a real-life opportunity to look at the situation with the benefit of experience and hindsight and see what we could have done differently or better via communication with the senior management team, the board, and vendors, which is always a valuable exercise.

In closing, for additional perspective, refer to the FFIEC’s Interagency Statement on Pandemic Planning from March 2006, which was published during the Asian avian flu pandemic, and the more recent Interagency Statement on Pandemic Planning from March 2020 in response to COVID-19. While these were written for financial institutions, the guidance provides instructions that can apply to all types of organizations and contains a variety of additional instructive references from other reputable groups.

author Branan Cooper Branan Cooper has nearly 30 years of experience in the financial services industry with a focus on the management of internal processes and controls—most notably in the area of third-party risk and operational compliance. Branan is a member of Infragard and the Professional Risk Managers’ International Association (PRMIA). Branan was selected in 2018 as an advisor to the Center for Financial Professionals (CEFPro) and board member for the Global Sourcing Research Network (GSRN).

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the impact of coronavirus on global economy

by Maya Katenova The issue of COVID-19 is becoming popular worldwide, and different experts, researchers and economists are doing research on this particular issue today. The issue of COVID-19 is a global problem, and almost all countries will suffer severe losses. However, there is no way to tell exactly what the economic damage from the global COVID-19 novel coronavirus pandemic will be. But there is a widespread agreement among economists that it will have severe negative impacts on the global economy. Daffin (2020) mentioned that early estimates predicted that major economies will lose at least 2.4 percent of their gross domestic product (GDP) over 2020, leading economists to already reduce their 2020 forecasts of global economic growth down from around 3.0 percent to 2.4 percent.

According to Daffin (2020), global GDP was estimated at around 86.6 trillion U.S. dollars in 2019 – meaning that just a 0.4 percent drop in economic growth amounts to almost 3.5 trillion U.S. dollars in lost economic output. At the same time, these predictions were made prior to COVID-19 becoming a global pandemic. It was discussed before the implementation of widespread restrictions on social contact to stop the spread of the virus. Unexpectedly, COVID-19 became a global problem. When it comes to discussing global stock markets, it should be noted that the Dow Jones reported its largest single day fall of almost 3,000 points on March 16, 2020 – beating its previous record of 2,300 points that was set only four days earlier. Congressional research reported that since the COVID-19 outbreak was first diagnosed, it has spread to over 190 countries and all U.S. states. The pandemic is having a noticeable impact on global economic growth. According to the report, global trade could also fall by 13% to 32% depending on the depth and extent of the global economic downturn.

The economic damage caused by the COVID-19 pandemic is largely driven by a fall in the demand, meaning that there are no consumers to purchase different goods and services. This dynamic can be clearly seen in such industries as travel and tourism. This reduction in consumer demand causes airlines to lose their revenue, meaning they then need to cut their expenses by reducing the number of flights they operate. The same dynamic applies to other industries such as new cars, oil, and other daily commutes. As companies start cutting staff to make up for their lost revenue, the issue is that this will create a downward economic spiral when these newly unemployed workers can no longer afford to purchase those goods and services. Unemployment rates will increase worldwide, and overall welfare will decrease as well. The COVID-19 pandemic could lead to a global recession. Despite the clear danger that the global economy is in, there are also reasons to be hopeful that this worst-case scenario can be somehow avoided. Governments understand that the effects of a demand-driven recession can be countered with government spending. Government spending is a part of Gross Domestic Spending.

Consequently, many governments are increasing their provision of monetary welfare to citizens. In addition, the specific nature of this crisis means that some sectors may benefit, such as e-commerce, food retail, and the healthcare industry as well.

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Finally, there is a fact that the crisis may have a clear end date when all restrictions on movement can be lifted (when a vaccine is ready). Many countries have taken small steps on the road to economic recovery by lifting lockdown measures. Manufacturing firms were among the first to return to work in some countries such as China. Governments are now permitting shops, bars, and restaurants to reopen. However, peoples’ habits are changing and as a result, demand on some goods and services will change as well. When it comes to discussing American economy, COVID-19 has left the United States facing an economic crisis, and the country’s GDP fell by 4.8 percent in the first quarter of 2020. Record numbers of Americans have lost their jobs during the pandemic, and the unemployment rate jumped to almost 15 percent in the first quarter of 2020. The Dow Jones Index fell and started to recover. However, it continues to feel the effects of a destructive period.

author Maya Katenova Maya Katenova, DBA, PRM, is teaching at KIMEP University. She is an Assistant Professor of Finance. Maya teaches bachelor students as well as master students including Executive MBA students. She has got Teaching Excellence Award in 2017. Courses taught in her portfolio include such courses as Financial Institutions Management, Ethics in Finance, Financial Institutions and Markets, Principles of Finance, Corporate Finance and Personal Finance. She supervised Master Thesis Dissertations of several students and has numerous publications in different journals including high quality (Q1-Q2) journals. Research interests are mostly related to financial literacy and retirement planning as well as corporate social responsibility and global ethics. Maya is Professional Risk Manager and is planning to teach Risk Management in future. Her future career is strongly connected with Risk Management Conferences, symposiums and workshops.

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Professional Risk Manager profile

by Adam Lindquist PRMIA Director of Membership If there was a PRMIA playbook for risk success, Cleo Li might be called a PRMIA superstar. Not only did she complete the PRM™ Designation program in only a year, she also leveraged her networking skills to meet people within PRMIA to help her land her first risk role. “My first job was secured in large part because of my PRM and the London Chapter.”

To understand Cleo, you must first know that she is smart. She attended the University of Waterloo with a degree in Mathematics, and risk was one of the courses she had to attend. “I liked the metrics and mindset of risk and chose market risk as a career path. The PRM was something I decided to study while I was still in school, and I had the student perspective of studying for tests. It worked well for me.”

Like many who take the PRM coursework, she found the flexibility of studying and taking exams extremely valuable to getting the work done. But she also discovered that it had other effects as well, “With the designation I had more confidence in myself and I feel I really interviewed better. I knew my stuff and those I interviewed with knew I did too.”

That ability to earn both a degree and the PRM gave her a robust resume. It was her connectivity with PRMIA peers that gave her opportunity. “I found PRMIA was essential to landing a job, especially since I was not educated in the U.K. The PRM gave me an advantage, and the London Chapter gave me the opportunity. People were eager to help me find a place to call home. “ Chapters can play a vital role in professional accomplishment because they give you the “Who you know” advantage. What you know, however, lands you in the role that can make the difference.

“I believe PRMIA stands behind its statement of helping me on my career journey. I know that I have opportunities ahead of me because of my PRM and my connectivity to the Association.”

author

PRM™ holder

Adam Lindquist Adam Lindquist is the Director of Membership for PRMIA. His career background includes vertical integration disruption as a regional manager in banking, business development resulting in a 5-year run as fastest growing specialty retailer, and many entrepreneurial ventures.

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Cleo Li

PRMIA Netherlands spotlight The Netherlands is home to one of the world’s largest ports (Rotterdam), home to much European industry, and, through that, to an extensive international finance network, which provides the necessary financing, insurance and investment. The capital city, Amsterdam, is home to the world’s oldest stock exchange, and is still today a large centre for trading euro denominated securities and derivatives, with a large pension fund, insurance, banking and trading sector. It was recently named as the leading global centre for Green Finance, an achievement that reflects Amsterdam’s history as as an innovative, entrepreneurial, and progresive society.

The recent departure of the United Kingdom from the European Union has provided an impetus to investment in the Netherlands, with many firms seeking to profit from the country’s business friendly environment, its excellent physical and technical infrastructure, and its well-educated, English-speaking workforce. Amsterdam is increasingly the EU home for many Japanese firms, as well as a number of emerging sectors in niche areas such as fintech, high-speed trading, and of course sustainable finance.

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risk agenda Consistent with PRMIA’s mission to promote, develop and share professional risk management practices, the PRMIA Netherlands chapter has an ambitious agenda. In common with chapters around the world, our members are concerned with the implementation of global prudential standards for capital and liquidity, as well as conduct-based rules, such as those relating to financial crime. The new decade brings a number of new challenges, relating variously to digitalisation and the associated cyber risks, climate change and green finance, and geo-political and macroeconomic concerns, such as Brexit and negative interest rates.

As risk managers, we are always faced with the twin challenges of responding both to the immediate (crisis and regulation), as well as managing the horizon risks and opportunities: PRMIA’s ability to bring together like-minded professionals in these domains and more ensures a challenging but fulfilling risk agenda.

PRMIA in the time of COVID-19 The Coronavirus outbreak has inevitably curtailed the standard chapter operating model, with mass gatherings of people no longer possible for obvious public health reasons. Our Q1 meeting this year was thus a virtual gathering, with two excellent speakers (Jesse Kaijser from ABN Amro, and Jeroen Groothuis from de Volksbank), who spoke eloquently on the Future of Banking Supervision and Regulation, with many locally based risk professionals dialing-in from home to hear their thoughts.

Virtual meetings allow content to be shared, albeit with the downside of reduced social contact: one cannot have ‘a quiet word’ with a fellow delegate at a virtual bar! The upside is that speaker location matters less: one can easily have virtual meetings which feature speakers from a number of different global locations.

Even regulatory matters, which are jurisdictional in nature, are increasingly set at the EU rather than national level, meaning that virtual EU chapter meetings are a good way of sharing expertise cross-border. A good example of this approach is the recent two-part webinar series commissioned jointly by the PRMIA EU leaders to examine the Impact of Coronavirus on European Banking, at which we considered both the macro- and micro-economic consequences on regulated firms; another is the recent climate discussion, led by the European Central Bank, on Integrating Climate Change in the ECB Supervisory Process. Meetings in the planning pipeline include a planned series of meetings on the topics of Cyber Risk and Financial Crime.

Other collaborations will follow among the different European chapter leaders, collaborations which we fully intend to continue into the future, even as lockdowns lessen. An option we’re exploring for the near future is the hybrid meeting, with a mixture of online and in-person participation, in order to maximise content sharing, whilst allowing some degree of (socially distanced) networking. If this is a success, it may become an embedded feature of the PRMIA member experience for some time to come: watch this space!

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Steering Committee PRMIA thanks its locally based volunteers for providing content leadership, industry promotion and organisational support. Without this core team, there would be no chapter.

• Arnold Veldhoen, Head of Risk, Jane Street Europe • Constant Thoolen, Global Head of Financial Risk, ING Bank • Harold Naus, CEO, Cardano Netherlands • Keve Müller, Managing Partner, Phoenix Advice • Marc Heemskerk, Head of Risk Analytics, Rabobank • Ovunc Sisman, CFO, Garanti Bank International • Tim van Hest, CRO, ORIX Europe • Remko Riebeek, Head of Integrated Risk Steering, ABN Amro • Wilson Jan Kansil, Senior Expert ALM, ABN Amro Bank PRMIA is always open to new blood; any member based in the Netherlands who is keen to get involved should feel free to reach out for a no-commitment, informal discussion.

Oscar McCarthy Regional Director Netherlands@prmia.org

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calendar of events Please join us for an upcoming training course, regional event, or chapter event, offered in locations around the world or virtually for your convenience.

PRM™ SCHEDULING WINDOW June 20 – September 11

CREDIT RISK UNDER COVID-19 UNCERTAINTY August 5 - Thought Leadership Webinar

PRM™ TESTING WINDOW August 17 – September 11

THE DOLLAR SYSTEM IN THE ERA OF COVID-19 | CURRENCY RISK MANAGEMENT August 19 - Thought Leadership Webinar

HOW CAN YOU LEAD WITH EMOTIONAL INTELLIGENCE? August 27 – PRMIA London Virtual Event

POOL PARTY – FRESH AIR FOR INTERNAL CREDIT RISK MODELS September 2 – Thought Leadership Webinar

FINANCIAL RISK MANAGEMENT IN PRACTICE September 15 – October 12 – Virtual Course

COVID-19 AND COUNTRY EVENT RISK September 16 – Thought Leadership Webinar 074

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TO BE UPDATED

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INTELLIGENT RISK knowledge for the PRMIA community ©2020 - All Rights Reserved Professional Risk Managers’ International Association