Evolution & Future Trends in Credit Risk

Evolution & Future Trends in Credit Risk

By Shannon Harris, Senior Research Executive, CeFPro

In preparation for the upcoming 8thAnnual Risk EMEA summit, The Center for Financial Professionals conducted an in-depth research survey into the risk landscape across EMEA. Through speaking with over 150 industry professionals we gained an insight into the top risk management areas. As is to be expected, a common thread that ran through was the focus on credit risk and how it continues to evolve.

We discovered that credit risk management continues to be a vitally important across financial institutions and remains a core focus. Over the past twelve months the top concerns faced by credit risk professionals has dramatically changed. Due to uncertainty within the political agenda, markets and the regulatory environment many risk professionals are faced with a new and diverse schedule. Below we have outlined the top three areas highlighted from our research, these were the areas which multiple credit risk experts pinpointed as their top challenge for the coming year.

Almost immediately after starting our research it became clear that one of the largest driving forces causing disruption within credit risk was Brexit. Given the uncertainty surrounding what Brexit actually looks like, credit risk departments and financial institutions more broadly remain uncertain as to the impact that could be seen. Brexit could have major disruptions to the treatment of instruments and in particular changes to derivatives and use of central clearing. Ultimately, this is creating extreme uncertainty for credit risk professionals, many have been faced with the task of preparing for life post Brexit without knowing the final outcome. It was also questioned as to whether uncertainty surrounding the future of Brexit could leave to a potential downturn in credit availability and the impact that could have on UK markets, many see Brexit as putting the UK on the road to a credit crisis, but again with such levels of uncertainty any future risks at this stage are speculation. For now, institutions must plan a way forward and develop contingency plans for all likely scenarios, planning is restricted with such uncertainty, however contingency plans must be in place to ensure the stability of the UK financial eco system.

Moving aside from the political agenda, another area highlighted was the recent implementation of IFRS 9. The IFRS 9 standard has been an ongoing challenge for several years now and though it has finally reached its go live date, uncertainty and questions remain. In the past the focus has been geared towards implementing the final standard and achieving regulatory approval, however, with reporting well under way, discussions can move towards managing the impact and demonstrating numbers. IFRS 9 was a cause for concern for many institutions prior to implementation, given the fundamental overhaul of traditional accounting practices and implementing impairment and loss calculations. Discussions for 2019 are moving away from implementation, to reviewing disclosures and the first full year cycle since the initial go live. Many were uncertain as to the initial impact of IFRS 9 and the number produced, with particular uncertainty surrounding asset classification, loan loss provisioning and loan modification processes, 2019 reviews the practical consequences of the credit process.

Whilst conducting our research we also asked credit risk professionals which areas they would most like to improve or develop. During our various discussions it seemed that portfolio management was an area which still raised levels of uncertainty. Although portfolio management is a priority for many firms, some had commented that this function needed increased oversight and alignment. In particular, there were still discrepancies over roles and responsibilities of the function and risk or business ownership. Fragmentation was apparent across departments and increased harmonisation is required across the industry to maximise profitability and oversight. As with any topic under the risk management heading, or event within financial services, data was a challenge for overall oversight and portfolio management, hindering the ability for optimum risk adjusted returns across the institution.

Overall credit risk is a very diverse topic and is facing a series of concerning challenges. In particular the political environment is causing controversy, until the UK receives some certainty there doesn’t seem to be an end in sight. Many risk professionals have taken the sensible choice of planning for the worst and putting a series of preparations in place. It could be days, weeks or even months before we know the full impacts on credit risk. In addition regulatory demands continue to be a staple within the agenda. IFRS 9 is a particular area of interest this year as we finally get to see a full retrospective view of the implications of the standard on credit risk. And finally portfolio management was also an area of concern for many professionals. There have been calls for increased collaboration within institutions to allow for an enhanced function. With a doubt the coming year is set to be especially exciting time and many are left to guess where we might be in 2020.

As mentioned credit risk management is a vitally important function within the overall risk landscape. To celebrate this we have dedicated a whole work stream to the topic at our upcoming 8thAnnual Risk EMEA Summit, taking place on the 11-12 of June in London. At the two day event we will be covering the evolution & future trends within credit risk including topics such as; Derivatives & clearing, leveraged debt financing, portfolio management, CRD 5, Brexit, IFRS 9 and much more.

To find out more about the summit please visit our website at www.risk-emea.com, in addition if you have any specific questions please feel free to get in touch. I can be reached at shannon.harris@cefpro.comor via phone at +44 (0) 207 164 6582.

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