Six questions I would raise as a board member of a bank these days
The strategic questions a bank management has to address
1. Liquidity and funding risks?
a. Are there any liquidity movements which require immediate attention?
b. Withdrawals of client deposits due to solvency concerns?
c. Difficulties in obtaining funding or increased margin requirements from counterparties?
d. Challenges from massive deposit inflows (e.g. negative rates on cash at central banks, leverage ratio requirements)?
2. Credit losses?
a. How much incremental IFRS 9 credit loss provisions are required to reflect the significantly deteriorated economic outlook?
b. Are there any concerns on the solvency of large counterparties?
3. Trading losses or limit breaches?
a. Did the bank face any material trading losses due to the sharp decline in equity market prices and/or spike in volatility?
b. Are there any limit breaches and what are the most critical market risk exposures?
c. Are there any concentrated exposures from failed debt or equity underwriting deals or material unhedged short-gamma exposures from derivatives (e.g., due to market movement and/or breach of barriers)?
d. Are there portfolios which are vulnerable to jump risks or trading interruptions?
e. Are there material exposures for which mark-to-market valuation became difficult because there exist no longer meaningful market prices?
4. Impairment of goodwill or intangible assets?
a. Are there indications for impairment of goodwill which may require an interim impairment test at the quarter end?
b. Are the discount rates used for the valuation at the year end still appropriate in the current market environment?
5. Current capital situation?
a. Do some of the above points lead to a reduction of the bank’s CET1 capital?
b. By how much will RWA increase, for instance because of higher Stress-VAR, backtesting exceptions, change in CVA exposures or operational risk incidents?
c. Are the capital and leverage ratios still within the targeted ranges?
d. Is it still reasonable to pay out the announced dividend for FY 2019?
6. Strategic business plan and future capital situation?
a. Does the new market outlook require revision of the short-term operating plan and longer-term strategic business plan?
i. What is the revenue impact of lower invested client assets and performance fees? May clients be forced to reduce their leveraged investments to limit their losses and to repay their Lombard loans?
ii. What is the impact of further central bank rate cuts on net interest income? What happens if in addition to Europe and Switzerland also the United States introduces negative interest rates?
iii. What are the credit loss scenarios and how much of it is already covered by IFRS 9 credit loss provisions?
iv. What happens to trading revenues and how much losses could arise from dynamic hedging strategies if the current equity market volatility continues?
v. For banks in Switzerland: What happens if the CHF suddenly appreciates by 10%-20% versus other currencies?
vi. What are the tactical counter measures to mitigate the revenue decline?
b. What are the implications on the capital plan?
i. Is there a need to suspend planned share buybacks or to reduce dividends in order to meet externally communicated capital ratio targets or regulatory capital requirements?
ii. Are capital ratios still sufficient under a stress scenario and is the stress scenario appropriate for the current environment, e.g., revision of scenarios or recalibration of shocks necessary?