Enhancing and Fine-tuning Risk Management Processes

Discover how Advocate consultants helped enhancing and fine-tuning Risk Management Processes in the wake of recession.

Inflation in Hungary is the highest it's been in decades, and that has businesses and consumers worried about a looming recession. A recession is a consistent decline in macroeconomic performance, at least for two consecutive financial quarters. Analysts at several Hungarian and international Financial Institutions and rating agencies are estimating that most likely the Hungarian economy will eventually be affected by a recession. It’s easy to panic at the first sign of a recession, but it shouldn’t be forgotten that it’s a natural part of any economy. Economies expand and contract, and a contraction is necessary long-term for growth. The Hungarian loan market experienced huge growth in the past couple of years, fueled by the excess liquidity provided by the Hungarian National Bank and EU funds.

Financial Institutions in Hungary were the primary actors responsible for channeling the EU funds into the economy in the form of moderately priced loans, which resulted in record outstanding amounts of debt in both the household and in the corporate sectors. In the wake of a looming recession, many Financial Institutions were instantly started to fine-tune their previously often neglected or downplayed risk assessment and early warning systems. Advocate consultants were in charge of assessing the new needs and requirements of the Risk Management Departments at several Hungarian Financial Institutions.

Requirements assessment and requirements analysis

Fortunately, the Hungarian National Bank (MNB) put a high emphasis on risk management and risk assessment during the expansion period, therefore most of the times prudent risk management systems and mechanisms were already in place and operating in the Hungarian Financial Institutions. There was no need for brand new, green-field system developments or system introductions. Advocate consultants’ main task was to carry out interviews with the risk management professionals, assess the requirements and identify the systems that needed to be modified in order to implement the necessary changes.

Most of the Hungarian Financial Institutions are operating on several sub-markets, from real estate mortgages and personal loans to automobile leases for the household to syndicated and investments loans for Large Corporations and revolving credit facilities for SMEs. That implies different kind of risks for different institutions with a different market share on these sub-markets. Advocate consultants were working with different departments and with different approach for risk management (with different levels of risk-aversion), but the common elements and main area of focus in many of our clients were the following:

  • Debtor default risk in the household segment: after years of unprecedented growth in lending, debtor default risk naturally comes into focus with an impeding recession threatening debtors ability to meet due instalments in time. In order to be able to predict and prevent a potential default, several fine-tunings were needed for early warning and Financial Institutions had to make sure their soft collection capabilities were increased.
  • Market risk in margin trading: ias the EUR/HUF cross experienced huge volatility in the past months (setting up new records one day after an other), Market Risk officers were keeping a close eye on margins and collaterals, forcing many Treasury Sales desks to initiate temperature check phone calls. Since Hungary is an export-oriented economy, with strong ties to the EU and US market, rapid changes in the strength of national currency threatens many hedging positions opened by both exporters and importers - and the Hungarian Forint sometimes weakened in a rate that is measurable to the average profit margin available in several industries.
  • Liquidity risk in corporate lending: Corporate Lending catering for large corporations is traditionally based on tight customer relations and interactions, which shouldn’t be abandoned in the face of an economic downturn. Fortunately, Risk Officers thought so, therefore more efforts were put into the mandatory yearly monitoring activities and yearly corporate limit renewals were put under more strict processes, including requests for intra-year balance sheet and provisional data and profit forecasts.

Implementation of the necessary changes

Advocate consultants prepared the necessary business requirements specifications, analysed the requirements in details and helped the Risk Officer prioritize them in order to being able to match with the available IT resources.

After the projects acquired green light and full commitment from management, Advocate consultants performed the task of analysing the current processes and involved IT systems for debt monitoring, loan and limit origination and cross-checked the current processes with the requirements.

The analysis resulted in several technical and process specification documents with a varying degree of necessary IT developments involved. Most of the times, simple fine-tuning of already available risk mechanisms and monitoring functionalities were enough for the enhanced risk mitigation and early warning predictions, but some cases more profound IT developments were needed. Advocate consultants were responsible for the end-to-end tests and the expertise of our consultants were used during the User Acceptance Test (UAT) phase as well in the form of support and coordination.

With the commitment and increased risk-awareness of the board, our consultants were able to help our clients with a carefully planned project plan and detailed specifications to execute projects that enabled the new and fine-tuned risk assessment and risk management processes that made sure our clients were able to predict, prevent or eventually face any possible negative events that could occur during an economic downturn.

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