Reassessing credit risk resilience

In an increasingly complex and interconnected financial environment, credit risk management is under renewed scrutiny. As stress-testing frameworks evolve to reflect more dynamic, forward-looking scenarios, risk leaders are grappling with new vulnerabilities – none more opaque and rapidly expanding than the private debt market.

Senior credit risk leaders at Risk.net’s Leaders’ Network meeting held in London in June explored the shifting landscape of credit risk management, with a particular focus on the emerging challenges of stress-testing in the context of limited transparency, inconsistent valuation methodologies and growing investor exposure to private credit.

Key takeaways:

• The increasing complexity of credit risk assessment, particularly in private debt markets, necessitates adaptive stress-testing frameworks that reflect evolving market dynamics.
• Institutions must simplify stress-testing processes to ensure clarity and focus, avoiding the pitfalls of overly complicated frameworks.
• Differentiating between regulatory stress-testing and internal risk management practices is essential for balancing compliance with effective risk management.
• Engaging with expert councils and fostering collaboration across departments can enhance the quality of stress-testing by incorporating diverse perspectives.
• Effective communication of stress-test results to senior management is crucial; narratives should translate complex risk concepts into actionable insights.
• Calibration of stress tests to account for unprecedented market events poses significant challenges; innovative approaches to scenario analysis are necessary.
• Relying solely on historical data can lead to a narrow view of potential risks; incorporating hypothetical scenarios is vital for preparing for unexpected events.
• The unpredictable nature of market events necessitates a proactive approach to risk management, with a focus on preparing for a range of outcomes.