Five key takeaways from the PRA’s response to Covid-19 and how it impacts IFRS 9
Covid-19 update 17th March 2020
Three immediate actions lenders should take to support society
23 March 2020
The global economy is entering an unprecedented era with mass disruption and far reaching financial implications to individuals and businesses. The health of the UK economy is dependent on the financial sector to react quickly, proportionally and fairly to help those significantly impacted through this period.
As lenders prepare to deploy measures to support individuals and businesses, risk departments are on the front line to protect and manage against the risks to the UK economy of this rapidly changing environment. These safeguards are imperative as they will ensure financial institutions remain afloat so they can continue to perform their role throughout economic recovery.
We have identified three key areas lenders must focus on immediately:
How lenders treat and support their most vulnerable customers will be critical over the coming weeks and months. We have seen lenders rapidly prepare for a sharp demand in forbearance measures, such as payment breaks, to support those in financial distress. Collections and recoveries strategies and actions have also been reviewed and altered to ensure they are appropriate to the changing circumstances.
Lenders must review and adapt customer policies without compromising important corporate governance procedures to provide the urgent support their distressed customers need. Operations departments should now ready themselves for a surge in payment break inquiries.
- Adapting to a changing demand for credit
Many individuals and businesses will turn to lenders to finance themselves through this difficult period. Unsecured lenders must prepare for increases in loan applications to support individuals through breaks in income or whilst awaiting government subsidies and expect both customer and applicant profile shifts.
It is incumbent upon risk experts to anticipate the changes that lie ahead to ensure the risks are properly understood and managed. Clients have asked us to support their senior management and risk departments with impacts assessments and responsive strategy adjustments.
- Dealing with capital and impairment impacts
It is imperative that firms continuously assess the rapidly changing situation to ensure the level of capital and impairment best reflects the risk on their book.
As a forward-looking estimation of impairment, IFRS 9 must include losses expected from the crisis although outcomes are very difficult to predict without detailed scenario analysis. The Bank of England will shortly announce guidance to lenders although they’ve already shared an expectancy that the short-term nature of the shock as well as government and authority relief packages (such as loan payment breaks) are incorporated.
Lenders should take a pragmatic approach to their models and consider using qualitative measures and management overlays to ensure the outputs are appropriate.
Financial institutions have a vital role in society right now and can contribute to stabilising the economy. Risk departments are integral to that and must react and respond quickly in a difficult environment.
Firms are already encountering resourcing issues, hindering the proper management of the many emerging challenges alongside dealing with business-as-usual activities. This problem may be compounded by difficulties in remote working or the temporary secondment of risk personnel to deal with sudden business-critical requirements.
As the situation has evolved, clients are requiring more flexible, back-fill resource to help manage these issues. Through system access and the ability to transfer data securely, experienced analysts can quickly support in fast-paced and challenging times such as these.
Working with industry bodies such as UK Finance, we are sharing best practice guidance and helping businesses tackle challenges and contingency plans remotely.
For more information, email [email protected] or call 0333 370 6600.