Financial Risk Management in the Post-Pandemic World

Financial Risk Management

Financial Risk Management

How COVID-19 is impacting risk management frameworks for financial services?

The financial services industry has been exaggerated its focus on developing operational resilience over the years. Companies are increasingly boosting their capabilities to cope with emerging risks introduced by digital technologies. In the time of crisis induced by the COVID-19 outbreak, financial institutions are likely to see systematic weaknesses accentuating the need of effectively managing the risk functions. In order to deal with this uncertain situation, banks will need to meet enhanced risk and capital adequacy.

They also require to be agile to ensure alignment with the new realities of the operating environment. Financial services providers must delineate an effective strategy that can cover significant changes to risk management methodologies, processes, and systems while focusing on operational resilience, enterprise stress testing and scenario analysis, cost and efficiency optimization, risk and finance alignment, and quantifying financial risk.

In its COVID-related risk management report, KPMG accumulated some known and expected financial risk implications. The firm has identified immediate financial risks faced by banks, including credit risk, market risk, operational risk, and liquidity risk. During the crisis, these four risks have been essentially impacted and have direct implications for capital management in financial services.


Financial Services for the New Normal

Many financial services providers, in their response to the COVId-19 pandemic, are taking effective steps while some have embraced alternative working models to keep their business ahead of the uncertainty. Since the pandemic put unprecedented strain over the productivity of most firms, a majority of banks are building operational resilience that helps them better respond to their customers. 

Regulators like BOE, FCA, and FRB, among others, are also assisting in creating operational resilience for financial institutions. In addition, they are bolstering institutions’ operations and focusing on the technology banks use.

Essentially, the crisis has lowered the consumption and demand of services, and weaken business investment that could have the biggest immediate impact. Because of supply shock and reduced demand, the economic outlook is also disrupted increasing the risk of evasion of payments across the world. To curb these challenges, supervisory guidance on business continuity is indispensable intended to restoring business processes after relatively short disruptions. 

Already, a number of agencies and authorities have issued guidance for business continuity in order to ease the effects of Covid-19, including updates to their existing regulatory framework. These recommendations typically based on the preparing and responding phases of a business continuity plan and fall under following segments, including ensuring customer and staff safety; reviewing the appropriateness of contingency plans to address a pandemic scenario; assessing telecommuting capabilities and increasing cyber resilience; identifying critical financial workers; coordinating with critical third-party service providers; and maintaining clear communication with internal and external parties.