COVID-19 puts treasurers on counterparty risk alert

“This week, we’ve had very significant decreases in stock prices of banks across Europe. The problem is that the credit rating agencies haven’t reflected that at all”, says Dr Edmund Barter, lead data scientists at CheckRisk, warning that as market volatility grow, counterparty risks will increase.

“What we’re telling our clients is that they need to understand that risk is building across the system and it’s important that as this crisis continues, because we do believe it will continue that that [firms] really have a responsive measure of their risk.”

On March 12 the UK officially moved into the delay phase in its plan to address the COVID-19 pandemic. The infection has had a substantial effect on financial markets, with markets on both sides of the Atlantic seeing their worse day of trading since 1987. Today markets are tentatively up, but such volatility demonstrates a greater degree of risks that treasurers must carefully manage.

“In particular, treasurers should be concerned about the borrowing and also their cash deposits. Not only from a credit but also a liquidity perspective. It might not be that they lose their deposits but withdrawing from a fixed term funds might be more difficult.”

Huw Bunn, director of strategy at Checkrisk suggests firms should be looking more carefully for instructive data.

“If [firms] just look at traditional measures, like credit rating agencies, credit ratings, or credit default swaps, that doesn’t necessarily tell you much about the underlying network and doesn’t help you understand how diversified you are and how you’re spreading your risk appropriately,” he says.

“I think the lessons that treasurers need to learn is from 2008 and it’s to understand what your [bank] network is, how, how well diversified, are you in terms of network.”

As the outbreak continues across the globe a number of countries have instituted lockdowns and other social distancing measures in an effort to curb the spread of the virus. Companies in all industries have been preparing their staff to work from home.

Christof Nelischer, group treasurer at International Personal Finance says their department is prepared to work from home. “Everybody has been asked to update and refresh their various passwords that are required for remote login, have your contact database up to date and re-familiarise yourself with some with the security protocols on working remotely. All of that has been done and everybody takes their laptop home with them. I’m pleased to say that the processes appear to work.”

He adds that treasurers should follow their IT department instructions for security.

“I’m adhering to the standard IT security protocols that you would expect. These include a secure connection, encrypted connection and taking home all my digital passes so I can log on to electronic banking systems.”

As the government expects the outbreak to worsen, treasurers should be prepared to navigate unfamiliar risks and work from a familiar location.