The outbreak of pandemic Covid-19 has impacted the financial structures of the whole world.

The spread of COVID-19 is expected to hit banks’ performance this year, but there is still hope that the industry will be resilient enough to face the challenges the pandemic is bringing to the economy.

Indonesia’s banking industry is well developed and resilient. Recently, Moody’s Investors Service has downgraded Indonesia’s banking industry outlook, along with 11 other countries in the Asia Pacific region, to negative from stable over concerns of rising credit costs and declining profitability as the pandemic is disrupting the global economy.

In this backdrop, Enterprise stress testing has become the de facto tool for managing systemic risk within the financial services industry. Today, not only is it the preferred supervisory tool across the world, but financial institutions are increasingly adopting stress-testing tools and techniques to better inform their business decisions.

For many finance organisations, scenario-based stress-testing exercises remain a huge burden because they are still executed using a fragmented, inefficient approach. Most organisations use data, methods, processes, and tools that are managed independently along with a product or organisational lines − and with limited central oversight.

Besides, the workflows they employ are often resource-intensive, laden with manual processes, and key person risks. But enterprise stress testing doesn’t need to be an organisational burden. What’s needed is a more sustainable approach that replaces time-consuming, resource-intensive processes with a powerful, efficient solution for both regulatory and internal stress-test requirements.

But, do the financial institutions have the tools to:

•  Model out their P&L under a wide range of different economic and non-economic scenarios
• Do they have sufficient information to know how financial stress testing can inform and support business strategy during the current crisis?
• Do the financial institutions know why previous assumptions and traditional forecasting methods are insufficient to cope with the crisis?

Transforming a Regulatory Requirement Into Competitive Advantage

Financial institutions are in dire need of better-informed decisions at this time of crisis. This can be made possible through expanded scenario-based risk management.

Mandated regulatory stress testing requires a significant investment by financial institutions – in technology, skilled people, and time. But prudent financial institutions are looking for – and realising – a significant return on investment by reaching beyond simple compliance.

These organisations seek to elevate stress testing from a simple compliance exercise to a strategic tool for business advantage.

Financial institutions are seeking a timely understanding of the potential financial impacts, have increasingly turned to scenario analysis. But, to be meaningful, the process must:

•  Scale to an increasingly possible scenario as the situation continues to develop
•  Provide a controlled process to perform and summarise numerous iterations of analysis
•  Offer understandable and explainable results in a timely fashion
•  Provide process transparency and control for qualitative and quantitative assumptions.
•  Maintain detailed data to support ad hoc reporting and concentration analysis.

Banks able to conduct rapid ad hoc analysis can respond more confidently and provide a data-driven basis for the actions they take as the crisis unfolds.

Operational Resilience is the key

Regulatory stress tests have taught banks the skills they need to manage through a well-defined scenario. Now leading banks are re-evaluating whether their stress test processes will be up to the task in a crisis.

The financial services industry is at the forefront of the response to the economic challenges brought about by COVID-19. It’s a tall order for banks and credit unions that involves serving as the lending conduit for government stimulus and providing loan forbearance to customers, members, and clients – while supporting their communities safely and soundly.

Financial institutions need easy access to agile, high-performance analytics to assess, monitor, and respond to dynamic business conditions. Rapid access to powerful risk analytics for managing liquidity, assessing policy changes, and proactively mitigating losses is what is required.

Exogenous Non-Financial shocks caused by pandemics/floods/wars invariably invalidate the use of empirically driven actuarial (‘atomic’) models aimed, primarily, at modelling the body of the distribution. Instead, the institutions are forced to revert to the use of structured scenario analysis to assess the range of potential Financial & Non-Financial (such as reputation) outcomes relating to these tail-risk events.