On April 8, 2020, the European Risk Management Council hosted a RiskVirtual meeting for European and APAC risk executives. The theme was How to Counter the COVID-19 Perfect Storm: Asia’s Case Study. European countries and the U.S. have become the epicentre of the coronavirus. Unlike the global financial meltdown of 2008-2009, however, the current crisis started in Asia, with China and other APAC countries being hit by the virus before the western world. Discussions at the meeting considered what risk management professionals at APAC financial institutions have learned during this outbreak when it comes to credit, market, and operational risks. Below is a summary of the key themes and issues that were covered.
Economic Pressure Points on Market and Credit Risk
We are navigating unchartered waters and facing challenges we have not seen before, even with the dotcom bubble, SARS, and other major disruptive events. This will likely impact portfolios much more intensely than in the past. The world is also more connected today, so we will see additional shockwaves. Some people thought the impact would be like SARS – short, but intense. As time has passed, it has become clear that the negative economic effects could spread into next year, although there is little consensus among economists on the shape this may take. There are some positive signs as China starts to open up, but it is too early to draw definite conclusions about the road ahead.
The U.S. trade war trade with China had already weakened the Chinese economy and a liquidity squeeze affected a number of privately-owned enterprises in the country. This was further exacerbated by the exit of some companies looking to protect their supply chains, as well as protests in Hong Kong. Against the backdrop of a recessionary environment, industries have been grouped into three categories: (1) Tier 1 are heavily impacted, such as aviation, hospitality, and tourism, (2) Tier 2 are moderately impacted, such as autos, certain commodities, and shipping, and (3) Tier 3 are hardly impacted at all, such as life and health insurance, industrial REITs, and property and casualty insurance. In addition, there are some bright spots, such as paper, technology, and pharma that are benefiting from a surge in demand. The impact for small- and medium-sized enterprises (SMEs) has also been more severe than for larger enterprises.
We are seeing a closer relationship between government, regulators, and banks in China to make sure that relief packages are effective. Chinese regulators understand that banks play an important role, and high reserve rates have been loosened to give them more liquidity to lend to certain industries. China also has a greater tolerance for non-performing loan (NPL) formation than others, and local finance authorities are lessening NPL standards in response to the outbreak. There is no real support for consumers yet, although some areas are experimenting with vouchers. Consumer debt poses a significant risk, however, and credit card delinquencies are high. We could see more direct support for consumers as we look ahead.
Hong Kong is currently facing a partial self-imposed lockdown as memories of the SARS pandemic have people taking measures on their own to mitigate potential infection. Face masks are more prevalent, but social distancing has not been in place. There is now a spike in infections, especially as Hong Kong residents who have been abroad return home. Measures to prevent infection are being stepped up again, but the living situation in Hong Kong makes it hard to completely lock things down. Restaurants are still open, but are required to space out tables.
Since Hong Kong had been rocked by months of protests, perhaps the business disruption was not as severe, as many people had laptops and were already working from home. That said, the economy faces many issues and COVID-19 is an additional burden. Hong Kong was one of the first countries to experiment with a relief program from the government called Helicopter Money, with every adult citizen receiving HK$10,000. Additional aid has also been announced for SMEs.
The Operational Side of the Business
For some firms in Asia, SARS and the Swine Flu had taught leadership to act quickly to focus on the safety of employees. Infrastructure in the cloud positioned many to cope well with increased traffic on virtual private networks and handle privacy and security measures for those working from home. Discretionary spending was also made available in some instances to help pay for at-home hardware, so employees could work more efficiently. It was also important to address human resource concerns regarding what to do about paid leave that had to be taken and similar issues. Importantly, firms introduced a host of new ways to engage with clients virtually.
Emergence of best practices. We have seen some best practices take shape. On the medical front, lockdowns and the use of personal protective equipment seem to be helping. With respect to fiscal and monetary stimulus packages, Europe has done a good job helping banks understand how these packages will work and what that means for the strategic decisions banks can make today and in the future. China has been vague about how they will work, adopting more of a ‘do it now and we will figure it out later’ stance.
Potential impact on globalization. There have been tremendous disruptions in supply chains, with Europe and the U.S. experiencing this now. This may cause a reassessment of dependencies across countries. There is also a question as to whether both business and personal travel will go back to pre-virus levels.
Higher demand for technology-driven solutions. People are learning how to be productive working at home and taking advantage of virtual conferences, video chat applications, and more. This will spill over into other aspects of their life.
A race for recognition. We see countries trying to get recognition for the efforts they are putting in place relative to others. Getting through this pandemic and the ultimate global economic recovery requires cooperation not competition.
The Impact on the Risk Management Function
The credit risk profession is evolving. While traditional approaches are still important, they are not sufficient to address the complexity of a connected world. Artificial intelligence and machine learning will be critical to analyse large amounts of data to uncover insights about credit risks. Interactions will be different as well as clients get used to digital engagement with banks in light of social distancing.