Banks must reinforce their risk management capabilities now and brace for the impact of substantial loan losses in coming months as the ending of government relief programs reveals the full financial impact of the pandemic, according to a new report by Boston Consulting Group (BCG).
The report, titled Global Risk 2021: Building a Stronger, Healthier Bank, cautions that the year ahead for banks is likely to be marred by company defaults and business insolvencies as the toll of the pandemic is fully reflected in corporate financial statements.
This follows a year in which banks’ strengthened risk provisions ensured greater resilience and enabled much needed support for their customers. US banks set aside considerably more for potential loan losses in 2020 than they did in 2019—with average provisions growing by 137%. European institutions similarly increased their provisions by 113%.
But this cushion could be eroded as the pandemic enters its second year. If the global economic outlook worsens, the impact is likely to be felt differently from country to country. BCG findings suggest that banks in nations where tourism, real estate, or transport make up a larger share of the industrial mix will be most affected.
Gerold Grasshoff, a BCG managing director and senior partner and a coauthor of the report, said: “Banks have learned from the global financial crisis of 2008–2009 regarding capitalization, liquidity management, and crisis response. Today, well-positioned and resilient banks are actively identifying opportunities for consolidation and growth. They need to remain cautious, however, as the measures supporting the economy wind down, revealing underlying issues involving nonperforming loans. Institutions now have a real opportunity to seize the moment and secure their own stability and resilience by reinforcing their core processes and working models, solidifying their foundations, and boldly acting on emerging opportunities.”
Banks Must Establish Safeguards Now to Lead in the Postcrisis Period
According to the report, banks must apply six core levers to help them emerge from the crisis in a position of strength:
- Upgrade scenario planning using refreshed data that allows banks to effectively evaluate operational, business, and financial vulnerabilities at the portfolio level.
- Shift to active credit portfolio management by establishing a dedicated credit-portfolio management unit tasked with deriving optimization recommendations.
- Augment collections and workout capabilities while creating supporting digital infrastructure.
- Optimize the balance sheet and P&L, working methodically to examine each core area and optimizing layer by layer.
- Advance compliance and nonfinancial risk management by formalizing and standardizing governance frameworks.
- Accelerate digitization with an emphasis on cloud adoption to gain agility and resilience.
As banks contend with the volatile landscape ahead, strengthening foundational capabilities that will define the next generation of leading institutions—including operational resilience as well as environmental, social, and governance (ESG) risk management—will ensure that they get a jump-start on recovery.
“The banks that are ahead of the curve have already integrated ESG risk management into their strategy and are now working on integrating ESG into their core banking processes and methods,” said BCG’s Gerold Grasshoff. “Institutions that take advantage of this opportunity will not only satisfy regulatory requirements but will set themselves up for success after the crisis.”
A copy of the report can be downloaded here.
To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or [email protected].
About Boston Consulting Group
Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders—empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.
Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.