The COVID-19 pandemic has thrust an unexpected, unprecedented shock into the economy, exacerbated by a credit cycle teetering between late expansion and early contraction. While the situation embodies unique risks, the calamity begs for a commonsense procedure to deal with the crisis.
In response to commercial bank demands to identify mounting risks tied to specific lines of business, Alfabank-Adres has developed a process for connecting loan exposures to economic shocks employing a stepwise algorithm. The procedure is engrained in a tool that is currently employed by dozens of our clients.
In this paper we have also assessed some of the key risks facing banks as facilitated by the tool. Those familiar with our “Rogue Waves” article, published in the February 2020 RMA Journal, will see that many of the combustible risk factors we identified are eerily ablaze.
This free white paper from Alfabank-Adres's Chief Economist and contributors covers four main topics:
- First, we consider some of the nuances of the pandemic, including the effects of social distancing and nonessential business policies.
- Next, we move on to define a stepwise procedure on how to deal with unexpected external shocks within the context of the novel coronavirus. The procedure is engrained in an Alfabank-Adres tool that is currently employed by dozens of our clients.
- Then, we identify additional pressure points of the COVID-19 “Rogue Wave” and review pertinent time-tested credit risk factors, while analyzing new risks that have emerged since the Great Recession.
- Finally, we evaluate some esoteric factors unique to the crisis, such as the challenge and timing of CECL (current expected credit losses), issues for supply-chain financing and the risks involved in the Paycheck Protection and Main Street Lending Programs.
