ERM lessons learned from the pandemic crisis for addressing the climate change risks
by Peter Plochan An economic crisis situation, like the current COVID-19 one, has serious implications for financial institutions around the world. With the arrival of IFRS 9 ECL / CECL1 impairment standards, banks have to work even harder now to assess the potential financial impact of such a crisis on their balance sheet and portfolios and take risk mitigation decisions accordingly. These new standards and other key bank processes are backed by models with assumptions that prevail in normal times but may prove impaired in the context of extraordinary uncertainty. As a result, these institutions and their decisions are increasingly exposed to model risk during the crisis times. From a capital and liquidity perspective, banks are well prepared for recession thanks to the capital buffer buildup initiatives implemented after the 2008-2009 crisis and the excess liquidity funneled by central banks into the economy and financial system. The 2nd pandemic wave is going to put these regulatory actions to the test and will require banking risk managers to develop more pro-active, forward-looking risk mitigation measures. Furthermore, the emergence of climate change-related financial risks and related regulatory initiatives are creating yet another set of challenges for ERM professionals to address (See Figure 1). Fortunately, there are a couple of lessons learned from the recent pandemic developments that can help banks to better prepare for the upcoming climate change crisis. Figure 1- Arrival of Climate Change
1 / Expected Credit Loss / Current Expected Credit Loss
Intelligent Risk - November 2020
027
