3. An uncertain future will continue to test models
Participants anticipate that unprecedented levels of uncertainty in economic conditions and government policies will pose challenges for balance sheets and scenario planning for some time. The “new normal” could also raise longer-term strategic and operating questions.
Challenging risk models and assumptions
The immediate focus is on finding ways to support growth and ensure that customers and employees get through the crisis safely.
But the unprecedented economic shutdown is challenging risk management. While some participants say they are within their extreme stress scenarios, they acknowledge that a long-term shutdown of large parts of the economy would continue to test models. As one director said, “Unemployment figures are way past most high-risk scenarios. We’re now looking at whether some of our assumptions need to be reworked.”
A long tail to recovery
Some participants cautioned that this crisis could have a much longer tail than many initially predicted: “We are looking at a timescale of at least six months with the current measures in place,” said one. In such a scenario, recovery timing and trajectory becomes increasingly difficult to project.
Further, the economic rebound may be more gradual than the V-shaped recovery some initially hoped for. Consumer confidence needs to come back – though it may be a long time before it returns to previous levels. One participant noted that if businesses did not have three to six months of sales, they were not going to last. “Banks have no option but to help companies get through this period. But banks are heading for huge credit losses under any scenario.”
Another observed that “depending on how long this lasts, some of the businesses we’re asked to lend to will not be viable.” One participant predicted, “Debt for equity swaps will happen.” Ultimately, governments and central banks will likely end up as the backstop.