Credit risk and emerging risks in 2024
CROs and CCOs share how risk mitigation strategies are evolving
Mitigating risk in credit portfolios has become increasingly challenging in the recent geopolitical and economic climate. Supply chain shocks continue to be on Chief Risk Officers’ and Chief Credit Officers’ radar, and the rising inflation and interest rates environment which was a factor in the Silicon Valley Bank collapse in early 2023 are still of concern.
The SVB collapse highlighted the velocity of risk events in our digitalised world. Asset quality and spread are key metrics in ensuring survival. Other non-traditional credit risks facing the panel of CROs and CCOs in the recent past included:
Volatility in emerging markets like crypto
Sanctions impacting the trophy asset real estate market
Margin calls in the private equity (PE) space now that money is no longer cheap
A panellist in the CRO discussion said the key to success was to plan, plan, plan. “Don’t wait for a crisis to figure out what you will do.
Credit risk is a continuing business-as-usual thing that requires constant hard work to identify issues.
“Getting it right in the credit field starts with getting your risk appetite right,” said another panellist. while advocating then bringing it down to each segment, making it granular and appropriate for each department of a bank, whether it is a wholesale or consumer bank unit.
You also need to stress test and continuously monitor to see if pre-identified operational and credit risk appetites are still correct. This enables you to deal with unforeseen events in an orderly manner. For example, during the Covid-19 pandemic, it was important to know who among a bank’s customers would emerge strongly after almost two years of business disruption, government assistance and, crucially, loan amnesties?
“We found out by using data analytics on transaction flows to identify patterns of behaviour that could help us identify who was doing well during Covid-19 and who wasn’t, feeding that into on-going credit risk assessments,” explained a panellist.
Another panellist next shared how the Ukraine war impacted their credit risk mitigation procedures and the impacts on clients around the world emanating from the instability it caused in energy prices, sanctions, and so on. The bank adopted a classic three lines of defence, which could just as easily have been applied to Brexit impacts. The bank looked at:
Credit risk. Immediately assessing how much exposure the bank had to the Ukraine war.
Going deeper identified where that risk was on a sector-by-sector basis and in what countries. What it meant for the portfolio was the guiding investigatory principle here.
Broader impacts on supply chains around the world were investigated next as the bank sought to mitigate the impact of the Ukraine war on its business, and that of its clients where it could help.
Stephanie Ip-Lamusse, Chief Risk Officer Wholesale and Head of Wholesale Credit Risk Management, HSBC UK, joins us to talk about the banking failures in 2023, and the key risks on her radar in 2024.
