Global Credit Databy banks for banks

Covid19 Crisis impacts and

developments

1GCD Covid-19 Round Table 22 May 2020

Global Credit Data

Content

22 May 2020 2GCD Covid-19 Round Table

Crisis Outlook, Scenarios for Recovery

Prudential and Monetary Responses

Banks Responses

Pandemic Stress Testing

Quick Impact Assessment!

Global Credit Data

Crisis Outlook, Scenarios for Recovery (as of May 11th, 2020)

Crisis impact depends on

infection spread/health care capacity

government responses

economic and financial transmission mechanisms to sensitive

sectors/segments in banks’ portfolio

Probably protracted pandemic

Renewed outbreaks in China and South Korea show risks of

reopening

Global GDP to fall from -3% in 2020, to -8% in 2021 (IMF 04/2020)

Long haul of Covid19 volatility until medical breakthrough

Gradual recovery not foreseen before 2022

22 May 2020 3GCD Covid-19 Round Table

This lasting external shock on demand and business models may lead to hard recession hit on

Manufacturing, Transportation, Aviation, Oil, Automotive, Supply Chain, Trade Finance

Retail Trade, Hospitality, Travel, Entertainment

Meanwhile investors are rallying on (some) equities and betting on progress for covid-19 cures, and on policy

support measures to tackle the global economic impact of the coronavirus pandemic

Source: Covid19 Facts Insights 03/25 McKinsey Oxford Economics

Global Credit Data

Prudential and Monetary Responses to Covid-19

Competent authorities implemented a large range of measures to support the economy and relieve the

operational burden on banks: « Lots of fire power put in this » (sic) BoE Governor Andrew Bailey

Decisive monetary and fiscal policy actions stabilized temporarily the financial vulnerabilities

E.g. US FED implementing USD swaps with Emerging Markets’ Central Banks for their monetary policies

Reference Rates stabilized just above zero

Purchase programs of government bonds and corporate debt

22 May 2020 4GCD Covid-19 Round Table

(IIF 04/2020) Most active jurisdictions: EU, UK, US, Canada,

Switzerland, Australia, Russia, Singapore, South Africa

Principally for releasing capital buffers, providing guidance for

their usage

Defining bespoke measures: e.g. lighter reporting

requirements, restrictions on dividend and share buy-back

Extending consultations/Implementation timetables

Guidance for crisis related: Provisioning, Definition of Default

and Non-Performing Loan (NPL)

Liquidity

Source: IIF https://www.iif.com/Publications-View/ID/3870/An-Aerial-View-of-the-Bank-Prudential-Regulatory-Response-to-COVID-19

Global Credit Data

Discussion: Macro-Economic Assumptions / Mitigation

Probability for these scenarios?

Progressive recovery in 2021

Global Recession from H2 2020 until 2022

Global Protracted Slump until 2023 – GDP decline feel?

22 May 2020 5GCD Covid-19 Round Table

Government support?

Do you factor Govt/Central Banks’ support in risk analytics and projections?

Using macro drivers (GDP, Rates, Unemployment..)?

Monitoring « hidden defaults » (forbearance, …)?

Global Credit Data

Banks’ Responses First, monitoring clients and portfolios

Supporting clients and communities with governmental credits,

payment deferrals, temporary limits…

Engaging in portfolio and B/S management, deleveraging NPL,

posting collaterals with Central Banks

Assessing clients segments impacted by shutdown measures

Then, adapting risk measurement frameworks: risk appetite,

risk models, stress testing

Shocks on the credit space are creating biases in the existing suite

of models due to

22 May 2020 6GCD Covid-19 Round Table

Adaptation of credit management strategies: origination and recovery

Changing value ranges for risk metrics, risk drivers, behaviours

Weakened model accuracy requiring expert based overlays/adjustments, delivering unexpected outcomes, procyclicality

Adaptation of risk measurement frameworks’ to crisis context

Key role of model performance monitoring and back testing to address crisis impacts on risk models

Identification of impacted drivers and control factors,

Recalibration of models and sensitivity analysis w/ control variables, w/o impacted elements

Monitoring of early indicators of model accuracy using target proxies

Source: Covid19 Primer 04/23 Oliver Wyman

Global Credit Data

Discussion: Banks’ Responses

Monitoring Clients and Exposures?

Which emergency tasks were assigned to risk function?

In general is there Covid19 Bal./Sheet management?

Were regulatory measures used (buffers, procyclical…)?

22 May 2020 7GCD Covid-19 Round Table

Updating Risk Measurement and Models?

Was the Risk Appetite (limits, thresholds…) updated?

Is Model Risk impacted? Unexpected outcomes, need for recalibration?

Is expert judgment/overlay more used in current context?

Global Credit Data

Pandemic Crisis Stress Testing Framework

Projecting NPL and losses by articulating:

Pandemic trajectory scenario using epidemiologic perspectives and drivers

Infection spread: Cases, Fatality Ratio, Risk Factors in population, Health System Capacity

Efficacy of containment measures: Social Distancing, Testing Breadth, Contact Tracing, Quarantining

Regional dependencies: Cultural Contexts and Social Behaviours

Long haul succession of infection waves with relaxing/tightening of social and economic shutdowns

Until therapeutic breakthrough or scaling up of public health tools

Assessing Economical and Financial transmission mechanism

Identifying macro-economical and financial drivers impacted, by sectors of the economy

Factoring in heterogeneity and cross-sectional dependences across sectors and customer segments

Stressing portfolio risk profile using rating transitions or other ECL projection framework

Projecting stressed NPL applying stress scenarios and Conditional Rating Transition Matrices (CTM) in

connection with above risk factors/scenarios

Quantifying scenario and downturn impact on recoveries frameworks and losses

22 May 2020 8GCD Covid-19 Round Table

Global Credit Data

Discussion: Pandemic Crisis Stress Testing

Pandemic Trajectory?

Is Pandemic Trajectory used to assess the current crisis?

DIY or buying projections from epidemiology experts?

Would the news of cure/vaccine trigger new projections?

22 May 2020 9GCD Covid-19 Round Table

Economical /Financial transmission?

Do you articulate Global/Regional/Industry impacts?

Eco/Fin/Industry drivers supplied by in house economists, industry specialists?

Finally how do you project pandemic ECL?

Global Credit Data

Quick Impact Assessment!

(from World Bank)

OECD GDP growth by year normalised:

50 year Average = +2.67% (SD = 1.61%)

1 in 20 year (-2SD) = -0.56%

1 in 100 years (-3SD) = -2.17%

(From GCD PD and Rating Database)

PD levels by year normalised:

Average for BB corp unsecured = 0.8% approx

1 in 20 year 1.6%

1 in 100 years 5%???

(From GCD LGD Database)

LGD levels by year normalised:

Average corp unsecured LC = 26% SD=5.5%

1 in 20 years + 2SD =+11% to 37%

1 in 100 years + 3SD =+16.5% to 42.5%

22 May 2020 10GCD Covid-19 Round Table

Resulting Average BB Corporate unsecured Loss

rates could be:

Average year = .8% ODF X 26% LGD = 0.21% p.a.

1 in 20 years = 1.6% ODF X 37% LGD = 0.59% p.a.

1 in 100 years = 5% ODF X 42.5% LGD = 2.13% p.a.

1932; -12,90%1946; -11,60%

2009; -2,50%

-15,00%

-10,00%

-5,00%

0,00%

5,00%

10,00%

15,00%

20,00%

25,00%

19

30

19

33

19

36

19

39

19

42

19

45

19

48

19

51

19

54

19

57

19

60

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

20

08

20

11

20

14

20

17

GDP Growth US 90 years 1930 to 2019

US real GDP growth% 90 year average Avg -1 SD Avg -2 SD Avg -3 SD

2009 was -2.5% (1.5 SD)

2020/21 could be -8% (2 SD)

Source: World Bank

Global Credit Data

Discussion: Data sources for impact assessment

Duration? How far is Covid19 crisis projected?

Crisis scenario worked back to 1 in X years (100, 1000)?

Use of reverse stress test for assessment of maximum loss/credit pain capacity?

22 May 2020 11GCD Covid-19 Round Table

Data? Which source of long history data is available to crisis and GDP decline?

With granularity matching specific breakouts’ patterns?

Is GCD historical data used? (e.g. LGD Dashboard?)

Global Credit Data

Appendix: Drivers for pandemic containment, economic

shutdown and re-opening impacts (selection) Epidemiology

Infection Rates, New Cases,

Fatality Ratio, ICU Net Balance

Risk Factors within population

Regional specificities

Mobility reports (TelCos,

Google)

Governmental Policies

Stringency of measures

Initiation, Containment

Approaches, Social distancing,

Scaling of Testing, Contact

Tracing, Quarantining,

Compliance: 2FTE/2W/patient

School Closure/re-opening

Public Transportation / Travel

/ Boarder Restriction

Containment Impact / Sector

Centralized Surveillance for

successful progressive re-

opening22 May 2020 12

GCD Covid-19 Round Table

Economy: shutting down

Supply Chain Disruption

Inventory Hoarding

Consumption

Airlines Suspension

EM FX slumps

Non essential business

closure

Remote/Work from home

Business failures

Massive Unemployment

Economy: Re-Opening

Car Traffic Congestion

Ratio

Labor availability, Return

to Work

Second wave lay-offs

Retail Sales (Hospitality,

Car, Smartphones…)

Source: Covid19 Primer 04/23 Oliver Wyman

Global Credit Data

Appendix: GCD Crisis Benchmarking Benchmarking of obligors impacted by Covid-19

for credit analysis, portfolio management and early warning systems

13Copyright The Global Credit Data Consortium 2020 All Rights Reserved. Confidential.

Operated in your

secured &

confidential GCD

framework

Focused on your

obligors &

industries

impacted by

Covid-19

Credit information

(Rating, PD, LGD) supported by

market

information

Benchmarking for

peer banks,

covering Europe, North America &

Asia

What?

Global Credit Data

Appendix: GCD Crisis Benchmarking System-relevant obligors are followed

throughout the Covid-19 crisis in a trusted setup and under full control of the banks

14Copyright The Global Credit Data Consortium 2020 All Rights Reserved. Confidential.

XYZ Airlines

March 2020 April 2020 May 2020

Detailed data return per obligor

Instant turnaround due to LEI

identifier

Free of charge for GCD members

Cre

dit R

isk

Est

imat

e(P

D, R

atin

g)

Peer Bank 3

Peer Bank 2

Peer Bank 1

How?

…