MORS 2022 ALM Survey Results published

MORS today published the results of its 2022 ALM Survey.

The report has been compiled from the results of the MORS Software 2022 ALM Survey and has therefore essentially been written collaboratively by the banks that took part.

The contributors represent a diverse array of banks varying greatly in the nature of their business, and the geographical spread of the contributors represents a global view of the banking business in 2022.

Initially, MORS Software launched the ALM survey during Spring 2021 as a means of gaining an understanding of financial institutions globally, at a time when ALM, Balance Sheet Management, Financial Planning, and integrated Stress Testing alike had been experiencing exceptional challenges.

While most of us hoped that 2022 would bring much-needed stability in our markets, it has so far proven to be a year not dissimilar to the previous 2. At the time of publishing the survey, the world was facing a continued and potentially increased volatility and lack of clarity. As we now publish this Survey Report, our markets and our banking industry is managing its way through yet another set of unprecedented challenges, which will undoubtedly shape our collective attention and focus for the remainder of this year and probably well into next.

The Russian invasion of Ukraine has triggered a chain reaction sending shock waves through almost all aspects of our lives. As we are all aware, macro-economic shocks and geopolitical events seriously affect financial markets and ripple through all aspects of banking.

At a time when the world has not yet recovered from the effects of COVID 19 and transitioning out of the restrictions imposed on the population at large, the Russia scenario has added insult to injury. War of any kind is always a major disruptor to financial markets, but when it involves a superpower and a significant global economy, the effects are potentially massive. As a major oil and gas supplying nation, the Russia scenario has sent the cost of energy through the roof. This has triggered the highest and fastest rise in inflation in decades. Sanctions imposed have led to the collapse of the Rouble, and the removal of many Russian banks from the SWIFT infrastructure has caused significant disruption to international trade.

The resulting creep in interest rates brings its own set of consequences, not least with respect to Lending Book quality. Combined with the general rising costs of living, a fuel price crisis, a post-COVID 19 sharp increase in real estate prices, pandemic induced wage stagnation, a shortage of housing stock introducing a whole range of complexities for banks trying to forecast their performance and plan effectively.

There is now much talk of the potential of a period of stagflation. The consequences of such a scenario will be significant and unambiguous. While not unprecedented in modern times, it has been decades since both inflation and unemployment have risen quickly and simultaneously. The current supply shock in the energy sector has the potential to drive economic growth down, not dissimilar to the 1973 OPEC Embargo. The resulting price increases in energy will increase the cost of manufacturing and the supply of almost all goods. With a simultaneous decrease in demand, the impact of such a scenario lowers the value of all assets and cascades firmly into the Retail Banking Book. A failure of central banks to act quickly in terms of monetary policy may trigger a snowball effect, resulting in significant economic sacrifices to be shared by all.

A market that in recent history has been saturated with liquidity now faces a shortage of liquidity, rising Probability of Default, increased Lending Pipeline Risk, a tangible and expressed threat of a global conflict, economic recession, and increased regulation.

Given current events, it’s easy to overlook the ongoing consequences of COVID 19. While in many places, the pandemic is far from over, in places where it is waning, transitioning out of the pandemic is proving a source of chaos. Staffing shortages are wreaking havoc in meeting the sudden increase in demand for logistics, travel, leisure, and failing supply chains are continuing to put salt into the wound of an already fragile economy.

As if the above is not already enough to manage, major issues such as Climate Risk have not gone away. It begs the question that if banks are already not satisfied with the data and tools, they have in place, then how on earth will they manage in the coming 24 months? A sentiment echoed strongly in the responses to our survey.

Once again, banks have been clear in expressing a lack of confidence in their tools and systems. In particular, Scenario Analysis and stress testing have been a challenge, not to mention data management and data availability.

At the end of 2021, the EBA published its first Discussion Paper on changes to the measurement and reporting of Interest Rate Risk in the Banking Book (IRRBB) and Credit Spread Risk in the Banking Book (CSRBB). It is also clear from the banks included in this survey that meeting such regulatory requirements will feature heavily in their workload for 2022.