Managing bank risk through the crisis perspective from Malaysia

Abstract

This paper considers the practical implications of the COVID-19 crisis for risk management in a bank in Malaysia and goes on to draw more general conclusions. It is suggested that standard strategic and credit risk-management practices will need to be taken to the next level in order for banks to better prepare for 2021. Recommendations have been given for improving stress testing and credit risk assessment so as to provide enhanced information on the basis of which difficult decisions can be made. In particular, it is suggested that greater use of reverse stress testing will be beneficial. This use should be coupled with more sophisticated relationships between macroeconomic scenarios and potential credit losses, which will give the bank management a much improved control over uncertainties in the macroeconomy. It is also suggested that banks apply a similar, more formalised (stress testing) approach to credit risk assessment of their larger customers so that a realistic assessment of their repayment ability can be made. Finally, some hard thinking about the future shape of banking needs to be carried out and positions taken in terms of technology, staffing levels, office space and product offerings.