Credit Risk is one of the major traditional risk that is actively managed by Banks across geographies .With Changing times the Credit Risk Regulations too have undergone tremendous changes .Regulations such as Basel I bought in some standardization in which credit risk was measured and reported, as times progressed and the framework matured regulations such as Basel II and Basel III saw a more risk sensitive approach towards measuring credit Risk. Post the Financial Crisis, Global regulators started issuing many regulations to contain and control various risk types. As the regulatory agenda has nearly firmed we see a focused rigor from regulatory bodies to ensure standardization and comparability across numbers that are reported by Banks for various risk types ,in line with the thought process we are a seeing many new regulations and also enhancements to existing frameworks which are trying to attempt this .In 2015 ,Bank for international settlement (BIS) came up with a revised standardized approach for credit risk as a successor to existing Basel III Credit Risk framework .Since then through various consultations this standard has undergone numerous changes and is finally zeroing in on an implementation date of Jan 2022.
If we were to get in to basics of credit Risk, It emanates when bank accepts deposits from its depositors and lends the same to its customers who can be sovereigns, corporates or retail customers. This activity creates an exposure for the Banks which can result in a potential loss if the borrower is unable to repay the debt in full or in part.
The image below provides a summarized view of how the Basel Risk Framework has evolved till date
The revised Standardized approach for credit risk was introduced with the following main objectives
- Reduced Dependency on external ratings agencies – External Rating agency plays a critical role in determining credit risk of the counterparty. Mechanical reliance on external ratings without any due diligence will lead to non- prudent risk management. By introducing the due diligence process bank has reduced dependency on External rating agencies
- Increased comparability across banks and jurisdictions:Though there are several implementation options at regulator’s discretion, the new standards will considerably aid in comparability between Banks and Jurisdictions.
- More focus on risk sensitivity& granularity – The revisions introduce newer asset classes and additional credit risk assessment within the framework, which will help in arriving at more prudent estimates of RWA and regulatory capital
- Dynamic Risk Weights –The Risk Weights as prescribed in current standardized approach are in line with the current economic conditions.
This approach sees introduction of two approaches namely
- External Credit Risk Assessment Approach (ECRA) – ECRA is applicable for rated exposures of banks in jurisdiction that allow use of External Ratings for regulatory purposes. Banks adopting this approach will also have to set up a Due Diligence framework to assess the rating applicability
- Standardized Credit Risk Assessment Approach (SCRA) – SCRA is applicable for countries where external ratings are not permitted, banks would classify exposures into three buckets (A, B and C) based on assessment of borrowers’ ability to pay and derive RWA accordingly
In terms of implementation, the Revised approach will have an impact on the below dimensions
- Capital requirements- likely to increase for banks of varying sizes due to additional due diligence requirements and conservatism.
- Data and Reporting– The revised guide line will require Additional data elements to be sourced and newer Data interfaces to be established along with adequate Quality Controls for computational as well as reporting needs. Due Diligence requirements will also require vast amount of Data for Banks which are following the ECRA approach.
- Computations – Rules for RWA computation would depend on the approach followed in each country rather than directly external rating. The below table provides a summary of impact of
|Exposure Class||Current Standardized Approach
|Revised Standardized Approach|
|Sovereigns||Mapping to external agency ratings and Export Credit Agency (ECA) scores and assign RW||No Change. current Approach is continued|
|Public Sector Entities||Mapping to external agency ratings and Export Credit Agency (ECA) scores and assign RW||One category less favorable risk bucket than sovereigns. Mapping to external agency ratings and Export Credit Agency (ECA) scores and assign RW|
|Multilateral Development Banks (MDBs)||Basic differentiation between the MDBs that have high-quality long term issuer ratings and other short term issuer rating||Due diligence of MDB counterparty is required along with existing approach|
|One category less favorable risk bucket than sovereigns (long-term and short-term claim distinction) or credit assessment of banks||Introduced 2 approaches:
ECRA: where national supervisor allows banks to use External ratings.
SCRA: for rest of the banks and for unrated exposures. Grade Based on Minimum Capital requirement along with Buffer capital.
Banks to carry out Due diligence of the customer credit worthiness. Outcome of due diligence factor should be considered while applying RW
|Corporates||Mapping to external rating agency and assign RW. Also at national discretion, supervisory authorities may permit corporate claims to receive 100% Risk Weights without regard to external rating.||Bank has two options:
Ø Where national supervisor allows banks to use External ratings, apply base RW based on rating
Ø Else apply 100% RW if corporate is not Investment grade or Corp
|Specialized Lending||No separate treatment from the corporate exposures||Exposure is Classified into 3 categories
1. Project Finance
2. Object Finance
3. Commodity finance
Where national supervisor allows banks to use issue specific external ratings, apply base RW based on rating
Else apply 100% RW for Object and commodity finance and 130% for Project Finance during pre-operational period and 100% during operation period
|Subordinated Debt, Equity and Capital Instruments||Investments in equity or regulatory capital instruments issued by banks or securities firms is risk weighted at 100%||Ø For speculative unlisted company RW 400%
Ø For Other Equity holding RW = 250%
Ø For subordinated debt and capital instruments other than equities RW 150%
|Retail Exposures||Risk-weighted at 75%, except for pastdues||Differentiation between the
Regulatory Retail (75% Risk Weight)
and Other Retail (100% Risk Weight) exposures
|Residential Real Estate||35% Risk Weight||LTV Ratios and the characteristics of repayment (if materially dependent on cash flows generated by property) are considered for deriving RW.|
|Commercial Real Estate||100% Risk Weight as per Basel||LTV Ratios and the characteristics of repayment (if materially dependent on cash flows generated by property) are considered for deriving RW.|
Challenges in implementing Revised Standards:The revised standards will also bring in below challenges for the Banks –
- Complexity and granularity of regulation requirement will increase extensive implementation effort
- Revised approach involves extensive data requirement such as data on residential and commercial real estate collateral etc.,
- Banks and financial institutions applying the ECRA approach have to introduce new due-diligence framework for assessing the counterparty credit worthiness independent of using external rating agency data.
- Need to re-align the business model and strategies as the revised approach will potentially result in an increase in RWA and capital requirements
The Revised standards will also have Cross Program impacts especially with initiatives around Default Management and Pillar III disclosures. Also many Banks have already started initiatives to focus on the revised standards so that they are better prepared to comply with the Jan 22 deadline and are also using Traditional Technologies as well as newer Digital technologies (like AI,ML & RPA etc.) to overcome the implementation challenges.
About the Author:
Venkatesh A S is a Chartered Accountant by profession. In his current position as a Domain Consultant with Risk Management and Compliance Practice of Banking, Financial services & Insurance (BFSI), a business unit of Tata Consultancy services. He has Rich and Extensive experience of 18+ years in consulting, implementation and solution design in regulatory compliance projects like Basel A-IRB, SACR, CVA, IFRS 9 etc., and has worked extensively with several banks and financial institution across Geographies.
Ajay Katara is a Domain Consultant with the Risk Management practice of the Banking and Financial Services (BFS) business unit at Tata Consultancy Services (TCS). He currently heads the Solution and Strategy for Enterprise Risk and Compliance Regulations. He has extensive experience of more than 14 years in Consulting & Solution design space cutting across CCAR Consulting, AML, Basel II implementation and credit risk, and has worked with several financial enterprises across geographies. He has significantly contributed to the conceptualization of strategic offerings in the risk management space and has been instrumental in successfully driving various consulting engagements. He has also authored many editorials, details of which can be found in his linked in profile (https://www.linkedin.com/in/ajaykatara/)
Research exposes the £68.8 billion opportunity for UK retailers
- Modelling shows increasing the proportion of online sales by 5 percentage points would have significantly boosted retailers’ revenues during the first lockdown
- 72% of Brits want retailers who started an online service during the pandemic to continue operating it full time
New data released today by global payments platform Adyen, outlines the economic gains that could be accessed by getting more UK retailers online.
Economic modelling conducted by Cebr for Adyen indicates that if the retail sector increased the proportion of turnover stemming from online channels by 5 percentage points, £68.8 billion would have been added to the economy during the first lockdown.
While retail turnover stemming from online sales has grown significantly during 2020 – from 19% to 28%, there is still considerable room for growth.
Myles Dawson, UK Managing Director of Adyen comments: “The UK retail sector is facing an incredibly tough quarter, so creating the link between physical stores and online channels is more important than ever. With the festive period approaching and many shoppers unable, or uncomfortable leaving their homes, establishing and maintaining a positive online experience is a billion-pound opportunity for retailers.”
The research of 2,000 UK consumers found that 31% are less likely to shop in physical stores now because of positive experiences shopping online during the pandemic. Furthermore, 72% of these consumers want retailers who started an online service during the pandemic to continue operating it in the long term.
However, making the process of shopping online as frictionless as possible will be key to unlocking the opportunity presented by online channels. 70% of Brits say that when shopping online, the ease of use is as important as the quality of the product, and 72% won’t shop with a retailer whose website or app is difficult to navigate.
Myles Dawson concludes: “Many retailers did amazing things during the pandemic in terms of adapting and creating new experiences – it’s a testimony to their agility that 57% of Brits said their expectations of the retail sector has improved during the pandemic. The challenge now is to consistently meet these expectations going forward. With local lockdowns in place, online channels will be key to serving many consumers in the short term. However, retailers need to see the shift to unified commerce as a long-term trend. The sooner they can demonstrate agility and jump on board, the longer they’ll reap the rewards.”
2 Research conducted by Opinium Research LLP
Want to serve your customers better? An effective online strategy is what financial institutions need
By Anna Willems, Marketing Director, Mention
A strong online presence matters.
Having a strong online presence, that involves social media is now a crucial part of all business strategies. Whether they are retail brands, sports teams, libraries or even restaurants, most companies are investing more and more in developing their digital brand image and online presence – financial institutions are no exception.
When it comes to market trends and innovation, financial institutions are first on the line. After all, we — people and companies — trust them to manage our money to the best of their abilities. And even more so than any other market, we demand secure, trustworthy, fast and user-friendly services.
Reaching such high expectations is not a given. To this point, banks and other financial institutions have no other choice but to have a perfect understanding of their market, their audience, and their needs. What they need to get there is a fail-proof online strategy.
Gaining a deep understanding of your market
One of the best things about using social media to learn about your audience is that people give unsolicited opinions. They speak their mind and share their thoughts candidly.
This is the key to help any business to learn about themselves. They get to analyze their audience’s challenges and aspirations without having to ask them directly or serve them time-consuming surveys and polls.
UK-based Asto, a company that is part of the Santander Group, is committed to helping small businesses have access to financial and non-financial tools. Asto was looking for something that could help them discover what their target audience was talking about and find opportunities to add to the conversation. Mention enabled Asto to keep on top of reviews and customer comments, which has helped us provide a better service for our customers.
Which platform suits your offering the best?
There’s no point choosing to create campaigns on TikTok if your customers don’t use it – you need to think about who they are and work back from there.
You do this by automating the process using a social listening tool. A social listening tool will help you to view your market as a whole and identify where the key conversations are happening — and, therefore, where you should be. What’s more, you will never miss any relevant mention of your institutions, products, services, or competitors.
Handling a crisis
Financial institutions need to watch carefully for negative press – social media is the first place people will go to if they feel they’re not getting the service they need. In theory, rogue employees or unhappy clients can post anything they like online to try and hurt your brand. And if their messages gain traction, you’ve gone from one person saying bad things, to thousands.
That’s why listening needs to be part of any crisis management plan. Now, sometimes, there are crises you cannot prevent. And those usually hit pretty hard.
Power of influencers
For an influencer marketing campaign to work for your financial institution, partnering with nano content creators may well be the best way to go. They’re ability to play a part in how they shape your brand story can make a huge difference when it comes to engagement and reason to believe in your service.
Many financial institutions are already leveraging influencer marketing. It’s an efficient strategy to: Build trust and gain credibility, reach out to new audiences and share engaging stories.
The online review conundrum
94% of consumers check online reviews before they decide to buy something or subscribe to a service. They need what we call social proof. It says that the more people say they use your service, the more it will look like a good service. In short, you need to show how happy people are using your service. But not all online reviews are positive.
Having said that, we find that financial institutions shouldn’t ignore negative reviews. Instead, embrace them as an opportunity to rebuild trust in your brand. Less delicately put, take the bull by the horns and turn them to your advantage. Always respond to relevant complaints (and as fast as possible). Take responsibility for what happened. Be helpful.
And ignore trolls.
Learn from the competition
Over the last two decades, a marketer’s daily life has greatly evolved. Most importantly, we now can measure everything we do, including the consequences of our actions on our business. Having said that, you can’t evaluate how well you’re doing without comparing against
Truth is that 77% of businesses rely on listening to keep an eye on their competitors. What this means is that 4 in 5 of your direct competitors are likely watching each and every single step you take. And you should do the same.
Setting the trend
From staying up to date with the latest industry trends and innovations, to keeping an eye on the competitors’ newest services, to being the first to know of potential brand crises – tracking relevant online conversations lets marketing and communication professionals working for financial institutions to stay one step ahead in an industry that is leading change and innovation.
Why the Boom is Long Overdue (and Here to Stay)
By Roger James Hamilton, CEO, Genius Group
Virtually every aspect of our lives has been taken over by tech, so why is it that our schools, that are educating the business leaders of tomorrow, are still operating in much the same format as they did 100 years ago?
The global pandemic put digital learning in the spotlight and an Edtech boom has ensued, with companies like Coursera, Quizlet and Udemy seeing unicorn style growth. And the market is not slowing down. The education technology (Edtech) boom will continue.
Resilience and Growth
Unicorns are defined by rapid growth. Traditionally, these companies are not overly concerned with early profitability, long-term sustainability or value creation as much as with putting their competitors out of business.
But something different is going on in the Edtech market. The unicorn has lost its appeal. When learning platform Quizlet achieved unicorn status this year, CEO Matthew Glotzbach was keen to play down the moniker reserved for start-ups valued at $1 billion or more, preferring to liken his company to a camel.
Unlike unicorns, camels are real, hardworking beasts. Respected for their adaptability to various climates, resilience, and abilities to survive for long periods without sustenance. These are all traits much better suited to weather the economic storms created by the pandemic.
Despite their considerable abilities to adapt to challenging conditions, the climate is looking particularly sunny for camels within the Edtech market. In fact, all creatures great and small have the potential to capitalise on unprecedented growth in this sector.
The nature of education makes it a traditionally slow-moving area, which renders it unattractive to some investors. Yet, the coronavirus outbreak and subsequent surge in remote learning this year triggered a flurry of uptake in e-learning platforms.
We’ve seen the adoption rate for new technologies be accelerated by events like this before. For example, the SARS crisis of 2003 contributed to the boom in China’s ecommerce industry, as quarantines lead consumers to shop online. Of course, this market trend did not slow down once quarantine restrictions were lifted. Ever since, global online sales have risen exponentially. The same is set to happen in the Edtech market.
Providing a Solution
As with ecommerce in 2003, the demand for Edtech in 2020 was already there. It has been there for years. For the past decade at least, there has been a notable need in recruitment for qualified talent in data science, coding and digital. Edtech can bridge the skills gap, not only within formal education but also for adult learners upskilling and reskilling for today’s digital world.
Similarly, the financial crash of 2008 had the effect of fast-tracking the rise of the gig economy, requiring millions more to learn entrepreneurial skills. The idea of a job for life is now a distant memory. The Edtech sector can deliver the tools to equip students of all ages with the skills necessary for creating their own opportunities, as well as exchanging knowledge and collaborating in a digital economy.
Rising unemployment, as well as competition for jobs and government furlough schemes has seen interest in digital learning courses for adults also soar during the past few months. Figures show that the corporate e-learning market is set to increase by as much as $3.09 billion between 2020 and 2024.
The Edtech boom kickstarted by the pandemic is just the beginning in a paradigm shift in how we view education and work.
Over the next 10 years, with the rise of artificial intelligence, automated technology, and augmented reality, traditional, manual and customer service based roles will diminish and there will be less need for a large workforce when computers and machines can do the role equally well.
The need for a truly 21st century education system that reflects the needs of the job market is long overdue. Edtech companies are offering solutions to many of these issues that have troubled the economy for the past decade or more.
A Different Animal
Enter the zebra (back to our animal analogies). These types of Edtech businesses will be the ones to watch within the sector. With zebra companies, there’s a sense of community and collaboration, rather than competition. They understand that there’s room for more than one superstar in a market. Zebras are herd animals after all. The zebra believes that competition is healthy for everyone involved—something to watch and use for motivation and growth. It closely observes consumer trends and continually strives to solve new and developing problems for those consumers.
For zebra companies, profit margin is vital because it is necessary for steady growth and sustainability. Revenues hover between $5M and $50M, it serves customers within a specific niche, requires annual growth capital of $100K to $1M, and generally has more than four streams of revenue.
Zebras are both black with white stripes and white with black stripes – they have a fluidity in their approach and are camouflaged at the same time. This creates a double bottom line: Zebras want to conduct real business, by solving a pressing problem in a sustainable way, whilst reacting to contemporary challenges. This too could be said of the Edtech industry as a whole.
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