The potential impacts of COVID-19 on Credit Risk Modelling & Provisioning requirements

A Southeast Asian Perspective

Banks across the globe have been (or are amid) developing sophisticated forward-looking provisioning models to allow for different simulated economic scenarios. These simulations include ‘downturn’ economic scenarios which are designed to stress test the bank’s provisions and capital levels.

However, the COVID-19 pandemic, today, has brought almost the entire global economy to a virtual halt, and the decline seen in the global GDP (and other macroeconomic indicators) is significantly worse than what would have been forecasted in banks’ forward-looking scenarios.

Implications of COVID-19 are expected to significantly increase default rates and credit losses leading to a large increase in provisioning requirements.

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The potential impacts of COVID-19 on Credit Risk Modelling & Provisioning requirements

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