McKinsey, American Management consulting firm recently published a report that reveals the measures to be taken to overcome the unexpected flaws in the operation of the banking sector by the Corona pandemic. The financial services sector is struggling with a huge loss of USD 743 billion and therefore business models needs adequate changes to cope with the challenges. Loss in productivity and lockdown disrupted industrial activities and raised hindrances in economy and hit hard the banking system.
The present business models and measures may not help the banking sector in the near future and needs to be recalibrated. The infrastructure and the systems followed by the sector may not be able to cope with the changes and challenges in post Corona era. Mckinsey notes that the banks did not have fallback plans to manage when the crisis did come. This indicates that financial institutions must review their business model strategies. The impact on the operations includes misleading early- warning systems, portfolio rebalancing, inaccuracy in rating models and failure of liquidity models in predicting the large outflows.
Banks should restructure their methodologies to welcome the post covid-19 world. Banks must be able to withstand on its own and should no longer rely on the analysis and judgements of experts. Financial institutions have to focus on making new adjustment models that fit for achieving their objectives and reducing the costs. It is recommended that the organizations should have a dedicated task force given with clear governance, tools for technologies and a disciplined operating model. Taskforce must consider four actions:
- Inventory of Model adjustments and Models at risk
- Applying model adjustments consistently
- Performing rapid challenge of all models
- Short and long redevelopment plans
Banks should implement Model Risk Management (MRM) in a more strategic and fundamental role. Model risk in banking is the type of risk occurs when a financial model is used to measure firm’s market risks and value transactions and the model fails or leads to adverse outcomes for the firm. Financial services must have an effective strategy in which they should consider an overview of the models and a contingency plan.
