Companies across the world have turned to their risk functions to navigate the challenges and stresses caused by the COVID- 19 pandemic, a survey by KPMG has uncovered.
The findings show that 65% of firms have performed additional stress tests due to the coronavirus, which has led to 30% taking management actions to increase resources of both capital and liquidity.
Given the scale of the pandemic's impact, it is perhaps surprising that only 28% of companies saw an increase in operational risk events, and just 15% reported a rise in the size of operational risk losses.
However, it has led firms to reassess their internal capital adequacy assessment process (ICAAP) risks, with 58% reassessing the inputs into operational risk scenarios, and 28% opting to hold more capital directly as a result.
“There is no escaping the impact COVID-19 has had on the industry, but it’s clear risk functions have played a vital role in helping firms navigate the crisis,” said David Yim, asset management partner at KPMG UK.
“The widespread response by firms – 92% of participants took action to address the impact on their risk profile and financial resilience – demonstrates risk management in action and the value that an embedded risk framework brings during periods of stress.”
While it is the larger firms who have performed more stress testing and enacted management actions, the survey findings show that smaller companies have made more efforts to reassess the ICAAP and hold more operational risk capital.
KPMG warned that the incoming investment firms prudential regime (IFPR) – which is now due to come into force in January 2022 – will also present challenges for investment firms.
Although 70% of firms have considered the impact of the regulations, the focus has been on capital and liquidity, and only 30% to date have performed detailed analysis to fully assess the liquidity and K-factor requirements.
“The other components of the IFPR around governance, remuneration, reporting and disclosure, including new ESG requirements, may contain surprises for the firms who have focused only on quantitative changes so far,” Yim continued.
“Only 13% of firms have fully assessed the remuneration policy and pay-out rule requirements under the IFPR. These new requirements will likely bring significant changes for some firms’ reward structures.
“While the implementation date has moved back, firms should not delay and instead use the time to adopt a more strategic than reactionary approach to realising the new regime.”
Image credit: iStock
Author: Chris Seekings