Covid-19: Pandemic risk – Special report 2020

The economic devastation wrought by Covid-19 is already significant: the hits to employment, gross domestic product and other key macro factors regulators ask banks to test to has already surpassed supervisors’ severely adverse scenarios, and shows every sign of getting considerably worse before it gets better. 

Once markets normalise, it seems unlikely firms will simply re-base their assumptions on the pandemic being the worst case for probability-of-default models, for instance, or gauges of interest rate volatility, and continue to model markets the way they always have. Even if models aren’t supplanted, they will rightly be subjected to challenge more routinely via alternative approaches. 

A willingness by banks to cast aside the old and revisit the notion that the future can be predicted by selectively replaying the past should be embraced: it could unleash a period of immense creativity in risk management. As former Chicago mayor and investment banker Rahm Emanuel once observed, it’s a hell of shame to let a good crisis go to waste.

 

Download the full 2020 Covid-19: Pandemic risk special report in PDF format

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