More than ever, banks’ institutional and private wealth clients need clear insight and individual risk assessment to manage their investment portfolios effectively. In addition, their expectations of user experience are just as high. So, how can banks facilitate in a post-corona world?
COVID-19 STRESS SCENARIO SIMULATION
In the last couple of months, the financial markets industry faced a new kind of crisis. In contrast to the last global economic and financial crisis (starting in 2007), banks and asset manager now need to asses new patterns of downstream economic impact of the current crisis and help their struggling clients to navigate through these times of uncertainty.
Given the nature of the COVID-19 impact on different economic and financial sectors, existing stress and recovery scenarios cannot accurately account for current economic developments. To make matters worse, even if generic simulations were suitable, there are multifarious discussions on the parameters of recovery - experts around the globe struggle to find a common base case on length, shape of the economic recovery. Wide disagreement about which industries are more affected than others create an even more uncertain environment.
The German Council of Economic Experts (Rat der Wirtschaftsweisen), for example, predicts a V-shape recovery scenario, anticipating an equally steep recovery from the sharp decline of the last months.
In contrast, German industry leaders assume a longer phase of turmoil resulting in a lowered break-even point in production and, eventually, industry consolidation.
Experts at the Organization for Economic Cooperation and Development (OECD) published a twofold analysis of a “virus is under control” recovery scenario and a second wave of infections extending the recession - but without stating their estimation of each scenario’s likelihood.
Regardless of which recovery scenario will materialize in terms of length and shape, there is additional discord about the economic impact on different industries, which makes data for investment decisions even more vague. In addition to the more obvious disparities between for example e-commerce, cloud & collaboration software providers and the worst-affected industries such as catering and hospitality there are more specific differences and impacts on the economic outlook for industries and even subsectors within industries, that can have a profound influence on every single portfolio analysis.
To summarize, there is currently no ‘standard’ or agreed on ‘most likely’ scenario for the coming months or possibly even years and thus, uncertainty - which is the most challenging issue when it comes to investment management - will remain.
TECH AND METHODS TO AID INVESTMENT DECISIONS
Naturally, top tier asset managers have research and tech capabilities as well as financial resources to implement highly specific stress scenarios in their portfolio simulation. Smaller institutional and private wealth clients are not able to implement similar individual scenarios and are dependent on the capabilities and offerings of their bank which might be limited as of the technical constraints in current (legacy) systems.
However, banks do have access to a vast amount of research and economic data. In addition, they are obliged to run and test stress scenarios and assess the impact on the banks’ balance sheet from a regulatory perspective. However, the mandatory reporting at banks is facilitated and managed by the risk control department who are typically less concerned with ‘user experience’ or ‘usability’ for end-clients.
To give institutional and private wealth clients useful insight and individual risk assessment of their portfolios, bank must apply different, more efficient (and more flexible) approaches:
- Introduce systems that combine great user experience with good usability and are also highly customizable in the scenarios calculated. This can give banks a competitive edge, strengthen customer loyalty and reveal untapped revenue potential.
- Consider the levels of (a client’s) expertise, options to choose between given scenarios to even alter scenario implied parameters can enable clients to incorporate their own view on which scenario or aspect of specific scenarios they deem to be most likely.
Software vendors are developing solutions or have already started distributing products for managing the evolving client demands as well as the growing complexity of economic and financial environments. Such vendors and products can help facilitate better understanding of portfolio risks for banks and their clients.
TAKING BANKS’ CLIENT PORTFOLIO SIMULATION TO THE NEXT LEVEL
Today, banks are in a position to offer superior client experience and satisfy highly individual information needs, while using fewer resources than ever. As software capabilities for enabling user experience and customization are increasing, the cost of computing and data storage is diminishing.
Regardless of a decision on ‘on site’ or cloud-based solution banks must provide sufficient computing power for individual and continuous scenario simulation. Capable infrastructure is key to enable a smooth and auxiliary information presentation to their clients. In addition to technical infrastructure, simulations with customizable scenarios and scenario parameters require a detailed and (best case) long history of granular and accurate data.
Leveraging their knowledge of financial markets and clients’ needs and equipped with a client- focused and customizable portfolio simulation, banks can enhance their client service significantly while also creating new revenue potential (by e.g. attracting additional clients with innovative service offering).
From investment advice and portfolio assessment based on individual risk aversion, to enabling clients use different scenarios as they deem them likely or even alter the underlying parameters of given scenarios, banks can provide comprehensive, individual and transparent risk and performance guidance – and not only in the time of crisis.
With core expertise in digital financial services, capital markets, data value and regtech, Capco provides deep banking and IT transformation and infrastructure knowledge, to help our banking clients achieve new levels of servicing their clients. Contact us to discuss how we can help you create a differentiated service offering for your institutional and private wealth clientele.
Supervisory Board of Linde Group, Steingarts Morning Briefing June 10th, 2020
Andreas Pfeil, Partner
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