# Risk Management redefined: navigating post-COVID disruption Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2021-12-28 Category: BUSINESS Category URL: https://financedigest.com/category/business Meta Title: Navigating COVID-19 Challenges: Optimising Risk Management Meta Description: Discover how financial services firms can navigate the challenges posed by COVID-19 with optimised risk management strategies for a secure future. URL: https://financedigest.com/risk-management-redefined-navigating-post-covid-disruptionhtml _By **Miles Elliott,** Risk Management Advisory lead at_ [_SAS_](https://www.sas.com/en_gb/home.html) From the very top of the house to the bottom, COVID-19 poses a comprehensive challenge to financial services firms. Every segment of the economy has been impacted and continues to be disrupted. This affects the full extent of the bank balance sheet, from determining liquidity strategies to maintain cash flow out to shoring up capital to protect against unexpected losses. With more lockdowns and restrictions on the horizon, the road to recovery will be long and uncertain. Against this backdrop, executives and board members urgently need real-time, accurate insight into the [financial health](https://www.financedigest.com/how-can-fintechs-better-engage-zillennials-with-their-financial-health-the-answer-lies-in-speaking-to-them-in-their-own-language.html "How can fintechs better engage Zillennials with their financial health? The answer lies in speaking to them in their own language") of their customers, their business and the broader economy. To provide this, banks need optimised and digitised [risk](https://www.financedigest.com/improving-risk-management-in-the-insurance-industry.html "Improving risk management in the insurance industry") modelling, risk decisioning and risk measurement capabilities to manage risk exposure across their operations and their portfolio. **[Building analytical](https://www.financedigest.com/lending-stream-builds-leading-edge-credit-platform-with-fico-analytic-software.html "Lending Stream Builds Leading-Edge Credit Platform with FICO Analytic Software") agility** From the [Risk department’s perspective, determining which customers represent an underlying risk to the firm](https://www.financedigest.com/aon-announces-agreement-to-acquire-risk-management-firm-creating-a-comprehensive-cyber-risk-management-advisory-group.html "Aon announces agreement to acquire risk management firm, creating a comprehensive cyber risk management advisory group") will be crucial. Yet so too will be determining the appropriate action and the [timing](https://www.financedigest.com/c-suite-nows-the-time-to-take-decisive-action-on-climate-change-heres-how.html "C-suite, now’s the time to take decisive action on climate change; here’s how.") of that action. In parallel, [risk will also focus](https://www.financedigest.com/pizza-group-dp-eurasia-sharpens-turkish-focus-as-russia-risk-high.html "Pizza group DP Eurasia sharpens Turkish focus as Russia risk high") on model re-calibration, and re-development as traditional, stable characteristics of prediction and affordability become skewed. Identifying new early warning indicators and [external market](https://www.financedigest.com/iomt-internet-of-medical-things-to-accelerate-the-external-fixators-market.html "IoMT (Internet of Medical Things) to accelerate the External Fixators Market") alerts is a priority. This [level of responsiveness requires analytical agility](https://www.financedigest.com/using-agility-to-resist-economic-instability-and-level-the-playing-field.html "Using agility to resist economic instability and level the playing field") and the ability to change and deploy decisioning, measurement and scenario models rapidly. A scenario-based analysis allows [firms to quickly and efficiently measure the impacts of multiple macroeconomic and business](https://www.financedigest.com/pizza-firm-dp-eurasia-considers-divestment-of-russian-business.html "Pizza firm DP Eurasia considers divestment of Russian business") scenarios on their portfolios. When a particular asset suffers adversely during a likely scenario, it serves as an early warning indicator. Instead of suffering unnecessary losses if the event comes to pass, the [bank now has the time](https://www.financedigest.com/georgias-tbc-bank-slashes-loan-decision-time-with-fico-solution.html "Georgia’s TBC Bank Slashes Loan Decision Time with FICO Solution") and insight to act to mitigate losses. [Firms also need](https://www.financedigest.com/europe-power-firms-need-1-5-trillion-euros-in-margin-calls-equinor-says.html "Europe power firms need 1.5 trillion euros in margin calls, Equinor says") to pay special attention to model governance. Scenario and risk-based [analysis can help plan for a myriad of potentials](https://www.financedigest.com/modified-starch-market-potential-growth-share-demand-and-analysis-of-key-players-forecasts-to-2032.html "Modified Starch Market Potential Growth, Share, Demand and Analysis of Key Players – Forecasts to 2032"), but they’re underpinned by models that continually need to be reviewed, switched out and retired. When these [models don’t undergo the necessary development](https://www.financedigest.com/research-and-technological-innovations-to-bolster-developments-in-animal-model-market.html "Research and Technological Innovations to Bolster Developments in Animal Model Market") and validation, there’s a danger that they can be applied incorrectly or generate inaccurate results. Therefore, [risk teams must](https://www.financedigest.com/ecb-must-be-prudent-with-rates-hikes-as-recession-risk-rises-panetta.html "ECB must be prudent with rates hikes as recession risk rises: Panetta") have strong review processes at every model development and deployment stage. This helps ensure that models are continuously updated and accurate, shielding the firm from unnecessary risks. We also see that [embedding stress tests as a constant process has additional benefits](https://www.financedigest.com/online-marketplaces-embracing-embedded-finance-to-benefit-both-customers-and-vendors.html "Online marketplaces: embracing embedded finance to benefit both customers and vendors     "). This year’s stress test results demonstrate that the UK [Banking sector](https://www.financedigest.com/how-effective-talent-management-could-disrupt-the-retail-banking-sector.html "HOW EFFECTIVE TALENT MANAGEMENT COULD DISRUPT THE RETAIL BANKING SECTOR") has responded well to the potential impact of unexpected losses, with all participating firms remaining above minimum hurdles and no bank required to strengthen its capital position. But there is still more that banks can do to align stress-testing capability with day-to-day [business activities](https://www.financedigest.com/euro-zone-business-activity-contracted-again-in-aug-outlook-bleak-2.html "Euro zone business activity contracted again in Aug, outlook bleak"). The exercise highlights the criticality for banks to have interconnected business [processes that can react to external market pressures and integrate to the determination and stress of their key](https://www.financedigest.com/1-easy-tip-to-make-a-key-e-commerce-process-more-efficient.html "1 easy tip to make a key e-commerce process more efficient") financial measures. This was evidenced by the resulting observations on the material [increase in bad debt provisions and reductions in profitability](https://www.financedigest.com/4-tips-for-landlords-to-increase-rental-property-profits.html "4 Tips for Landlords to Increase Rental Property Profits") observed under the stress scenario. This point further underlines the benefit of embedding the depth of capability required to execute a Regulatory Stress [Test with the ability for a bank to undertake its own internal business planning](https://www.financedigest.com/uk-not-planning-covid-testing-for-travellers-from-china.html "UK not planning COVID testing for travellers from China") activities. **Continuity in the face of crisis** Banks face a myriad of [risks and operational](https://www.financedigest.com/mitigating-operational-risk-through-centralising-reconciliation.html "MITIGATING OPERATIONAL RISK THROUGH CENTRALISING RECONCILIATION") challenges in the current climate. For example, with the extension [of government aid schemes uncertain amid the Omicron variant, economic risk](https://www.financedigest.com/5-challenges-to-overcome-in-governance-risk-and-compliance-magazine.html "5 Challenges to Overcome in Governance, Risk and Compliance-Magazine") regarding customers’ ability to finance their borrowing remains in flux.  Firms [must therefore be vigilant to mitigate potential](https://www.financedigest.com/advisors-must-play-a-bigger-role-in-unlocking-scale-up-potential.html "Advisors must play a bigger role in unlocking scale up potential") shortfalls. In response to COVID 19, increased competition and emerging technology we see that [banks are right in the midst of their Risk Management](https://www.financedigest.com/strategies-banks-use-to-manage-liquidity-risk.html "Strategies Banks Use to Manage Liquidity Risk") Transformation. As a result, banks are continually striving to strengthen their ability to execute and continuously challenged to [enhance their ability to govern and control](https://www.financedigest.com/trendrating-1-3-delivers-faster-data-analysis-and-enhanced-risk-control-tools.html "Trendrating 1.3 delivers faster data analysis and enhanced risk control tools"). Statements by the Bank of England reinforce this with their observation of an [improving trajectory but with further advancement needed](https://www.financedigest.com/struggling-banks-need-to-modernise-and-improve-software-quality-management.html "Struggling Banks Need to Modernise and Improve Software Quality Management") in the ability of banks to stress certain financial measures and integrate end to end business processes. The positive reality is that [banks already have the processes in place for regular stress tests](https://www.financedigest.com/what-to-make-of-the-headlines-brexit-and-bank-of-england-policy-eba-bank-stress-tests.html "What to make of the headlines? Brexit and Bank of England policy, EBA bank stress tests") and scenario-based analysis. However, in most cases, [stress testing](https://www.financedigest.com/demystifying-us-feds-approach-on-systemic-climate-risk-stress-testing.html "Demystifying US Fed’s approach on Systemic Climate Risk Stress Testing") activity should be scaled up to cater for more scenarios over a longer time frame and become business-as-usual. That’s why [banks should focus on streamlining and automating](https://www.financedigest.com/banking-on-snow-automation-platform-for-success.html "Banking on Snow Automation Platform for Success") these processes as much as possible. In addition, the use of [advanced analytics](https://www.sas.com/en_gb/solutions/analytics.html) and [AI](https://www.sas.com/en_gb/insights/analytics/what-is-artificial-intelligence.html) solutions will help risk teams make sense of their data, leading to faster and more informed decision-making. During a crisis, [risk is the driver of a bank’s](https://www.financedigest.com/governments-and-central-banks-risk-inflation-bank-of-england-has-done-its-bit-now-the-politicians-turn.html "Governments and central banks risk inflation, Bank of England has done its bit, now the politicians’ turn") most crucial decisions. Uncertainty will be the only certainty for some time to come, but banks can meet the challenge through persistent analytics and a streamlined [approach to model](https://www.financedigest.com/new-charitable-commission-sharing-model-is-for-lifeprice-comparison-website-launch-bolstered-by-innovative-approach.html "New charitable commission-sharing model is for lifePrice comparison website launch bolstered by innovative approach") governance. Firms should operationalise what they’ve learnt over the past few months to define a [strategy that will transform](https://www.financedigest.com/can-ai-supercharge-your-banks-digital-transformation-strategy.html "Can AI supercharge your bank’s digital transformation strategy?") them going forward. [Risk Management](https://www.financedigest.com/early-detection-of-mismatched-trades-is-key-to-managing-risk-and-maximizing-profits-on-the-pl-desk.html "EARLY DETECTION OF MISMATCHED TRADES IS KEY TO MANAGING RISK AND MAXIMIZING PROFITS ON THE P&L DESK") Transformation has to be at the centre of all activities involving customers, colleagues, companies and communities. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---