Addressing rising credit risk as a consequence of COVID-19 crisis

Since the outset of the COVID-19 crisis, ASBA has worked with Oliver Wyman in developing recommendations to increase the resilience and preparedness of their financial systems.

During the first phase of our collaboration, we focused on developing a crisis playbook to preserve financial and banking services that are critical for the functioning of the economy and financial stability. The work revealed several medium-term initiatives that could improve the resilience of the financial systems concerned, increase their level of development and strengthen financial inclusion. Following this line, we prepared a series of workshops to focus on the issue of rising credit risk and risks to bank health, as well as related supervisory policy and measures.

As the COVID-19 crisis evolves, deterioration of credit portfolio is becoming a concern for banking supervisors and requires a holistic approach from a public policy perspective, covering:

1. 1. Monitoring the vulnerability of economic agents to assess liquidity demand of real economy is critical due to the particularities of the COVID-19 crisis.
2. 2. Assessing solvency and liquidity of financial sector as the marked recession caused by COVID-19 crisis will almost certainly leave heavy traces on bank balance sheets and profitability prospects.
   
   
3. 3. Responding to bank failures as a broad impact of the recession might cause a larger number of banks to get in trouble and ultimately fail. Such a scenario constitutes a systemic issue even if each bank for itself is far from being systemic.
   
   
4. 4. Promoting active NPL management as experience shows that a large increase in volume of distressed assets requires banks to take more systematic approaches.
   
   
5. 5. Supporting deleveraging with systemic solutions in cases where high NPL volumes are hindering economic recovery.

Fortunately, also due to the regulatory reforms during recent years, many banks today are in better shape than in previous crises – allowing the financial sector to play an important part in the solution instead of being the problem. Banking supervisors and the private sector both have a role to play to ensure financial stability is not put at stake