Technology redefining Financial Risk Management post-COVID-19

Covid-19 has put severe strains on people and businesses across the world. The financing industries are impacted heavily by the sinking credit quality, fluctuation in market conditions, and challenges to digitalize the operations, etc. The pandemic has put the question on the existing risk management framework in terms of its agility and usefulness.

Unsecured loans are a major issue across all the banks as it severely impacts the financing companies on account of bad debts and profit. To date, the choice was to rely on the applicant’s creditworthiness based on the history of the client and financing records. However, Covid-19 has stressed the banking industry to lean on various machine learning models that can analyze the data and help to understand the creditworthiness of the loan.

Due to the prolonged impact of the pandemic, financial institutions are facing a major challenge in managing operations remotely. There is a need to have robust governance processes, systems, and controls for mitigating the operational loss.

Various potential risks that the organizations can face:

a. Struggle to strike the balance between cost-cutting and maintaining operations.

b. Lack of resources like unavailability of staff leading to delay in meeting regulatory compliances.

The pandemic is a wake-up call for organizations to consider holistically their operational resilience to face extreme events.

Operational risk testing methodology plays a key role in meeting regulatory expectations across the world. It includes a review of scenario setting, stress testing approach in data selection, frequency severity, parameter or multipliers, assumption, justification model limitation.

Managing liquidity risk is a major focus for regulators since the 2008 financial crisis however its importance has been highlighted since covid-19.

Under Basel standards, banks need to calculate their daily liquidity coverage ratio however a major requirement that needs to be fulfilled by the banks is liquidity stress testing. To fulfill these, banks need to adopt new models, create new scenarios, and run them.

Technology has acted as an aid to finance during covid-19 and its significance will be more even in the future.

By Sharvari Saraf
PGDRM Batch Jan 2020-21