Consulting firm of the year: KPMG

Asia Risk Awards 2020

Tom Jenkins, KPMG

A bank in Hong Kong recently called on KPMG for help to gauge its true financial health and report to the regulators as it was getting nonsensical numbers in its credit risk model due to the far-reaching economic impact of the Covid-19 pandemic.

KPMG worked with the bank on a tight timeline to come up with a ‘challenger model’ for estimating what the firm’s expected loss provisioning might be under the financial accounting standard IFRS 9. Challenge models are often used to question the assumptions embedded in a firm’s primary model, and potentially come out with a more sophisticated estimation.

This is a good example of how KPMG continues to bring a comprehensive set of risk expertise, market insights and regulatory understanding to its clients, even under the new market reality of Covid-19. Financial institutions and non-financial corporates alike are now facing new challenges, which snowballed from issues around operational resiliency into a much wider financial impact.

KPMG is advising its clients on at least eight strategic issues facing banks in the new Covid-19 reality. These include sector-specific economic impacts, maximising growth potential while controlling costs, credit portfolio restructuring, monetary stimuli, fiscal deficits and environmental, social and governance needs.

“For all of our engagements over the past three to four months on credit risk, interest rate risk in the banking book, large exposure reporting, risk strategy, risk framework, stress-testing and so forth, Covid-19 is part of the conversation. There are always issues or questions or challenges posed by Covid-19 that we need to think about because things are still changing rapidly,” says Michael Monteforte, partner in financial risk at KPMG.

He adds that Covid-19 has prompted industry to refocus on managing risk models, and has raised the need for more rigour around the validation of such models.

“We have been able to provide some of our clients with ideas. We have been able to give them some quick wins internally, prioritising which models may be more or less reliable,” says Monteforte.

KPMG has high hopes for leveraging off the tools and solutions it has developed over the years to help clients with the challenges associated with financial reporting.

KPMG has helped several firms over the past 12 months to meet the regulatory scrutiny of two of the hottest topics in Asia-Pacific: market risk and counterparty credit risk. Most notably, the Hong Kong Monetary Authority and the Securities and Futures Commission are among the most active regulators in pushing the agenda.

For instance, the HKMA did a large-scale self-assessment exercise that required all the banks in Hong Kong to assess their capabilities on counterparty credit risk management. Some banks, especially some branches of foreign banks, have turned out to lack the quantitative tools needed to demonstrate their ability to measure counterparty credit risk.

KPMG developed a computational tool – using Virtual Basic on an application-based Excel template – to model the exposure-at-default for counterparty credit risk, using the Basel Committee on Banking Supervision’s standardised approach for measuring counterparty credit risk (SA-CCR). The solution has been widely accepted by banks in the region, with 14 banks currently using it.

Market risk is also a core focal point, with the Hong Kong regulator hoping to roll out the Fundamental Review of the Trading Book (FRTB) in coming years. The consulting firm has developed its solution to help clients measure their capital requirements under the FRTB.

Another big regulatory theme – liquidity stress-testing – has been covered by KPMG as well. The firm has come up with an improved stress-testing framework that could also assess the impact of Covid-19 on a bank’s cashflow position from different supplementary leverage ratio line items.

“Our behavioural modelling skills are in high demand as worst-case forecasts become the new reality,” says Tom Jenkins, partner in regulatory compliance at KPMG. “KPMG’s liquidity stress-testing solution allows our clients to calculate cashflow for stress tests and allows them to understand the survival days in different stress scenarios.”

Regtech leader

Asia’s regulatory scene is known for its fragmentation and broadness. Technology is thus at the heart of keeping pace with the regulators as they demand more stability and transparency from financial institutions.

Regtech has grown popularity in recent years as it can enable better compliance outcomes for the benefit of the customers, while for regulators it has the potential to help them strengthen oversight.

KPMG is well aware of the trend and, in July, the consulting firm was appointed by the HKMA to help promote regtech adoption in the Hong Kong banking sector. KPMG will develop a whitepaper and conduct related activities on the regtech landscape, adoption and challenges for the industry.