Mitigating the COVID-19 Catastrophe From a Treasurer’s Perspective
In addition to the red alert being issued world-wide by the governments on the epidemic of the new coronavirus 2019 (COVID-19), global financial markets have witnessed massive turbulence and uncertainty. The Dow Jones Industrial Average has hit rock-bottom for the first time in the financial history. This pandemic situation have shaken the foundation of wide-range of industries with regard to wreck of supply chains, cessation of travel and entertainment, etc. To combat the current upheaval, Federal Reserve, the Bank of Canada and the Bank of England have dropped interest rate benchmarks with the conjecture of oil price disaster and global recession. Treasurers should evaluate the risks associated with the meltdown and devise robust rescue measures.
Key focus areas to consider for immediate mitigation of risks:
- Revision of risk assessment
- Design effective risk management frameworks
- Investigate pre-planned measures to curb stresses
- Effective communication
Revision Of Risk Assessment
The need of the hour is to take pivotal actions effective for a short period to forecast possible deficit and assess cash reserves to maintain the firm’s current liquidity position. Revise the earlier plans for evaluating alterations to business liquidity and funding needs – for example, amend cash-flow projections. It is time to grow the cash reserves for a short time frame to mitigate risks. Re-evaluate unanticipated risks such as operational closure, diminished capacity of financial market utilities, loan remission, etc.
Design Effective Risk Management Frameworks
Device accurate frameworks such as Liquidity Stress Testing (LST) and Early Warning Indicator (EWI) for continuous monitoring and responding to probable deficits precisely. Liquidity Stress Testing involves testing, review and measurement of continuous evolution of the current calamity or the emergence of new crisis situation. In other words, LST aids in measuring the present market stress as well as emergence of new stress leading to new crisis situation, on account of the rapid spread of the virus. For example, development of light recession with the prevalence of the virus for the next 6 months vs. major crisis situation developed on account of chronic presence of the virus.
Early Warning Indicators take into account two stages. The initial stage entails evaluation of current early warning indicators exposing the identified liquidity risks as well as figuring out new indicators for monitoring new liquidity risks. In the last stage the treasurers should gauge the indicators in the past few months that should have been detected by the framework.
Gauging anticipated risks requires repeated calibrations of the designated frameworks. Key focus areas should be regular stress testing, orchestrating liquidity risk identification regime with respect to specific pointers such as disruptions related oil price, supply chain issues, etc.
Investigate Pre-Planned Measures to Curb Stresses
With changing market scenarios and stresses, devise and action plan for immediate mitigation of newly developed liquidity stresses. Evaluation of contingency funding actions should be contemplated to understand its relevancy in the present situation and also estimate future course of actions for devising new contingency funding actions. Accessibility of real-time reports on securities holdings by CUSIP/ISIN and monetization capabilities either through Discount Window or repo are essential for examining operational aspects.
Involving various stakeholders such as clients, regulators and investors in formulating effective strategies with regard to liquidity risk management is necessary to fortify organization’s liquidity position. With the anticipation of leverage ratio relief or LCR breaches, continuous dissemination and reporting of vital information related to liquidity risk management to the regulators are of prime importance in order to take proactive measures in case of market fallout.
One of the key responsibilities of a treasurer is to predict and assess the EWIs to curb liquidity tension and steer the firm through extreme economic turbulence and vulnerabilities. The implementation of risk management frameworks and strategies during uncertain times such as the current COVID-19 situation, can help firms endure the crisis and stay alive afterwards.
If you wish to enhance your treasury operations V-Solve, with its years of experience working with leading global clients, can support you with our next-gen, cloud-based solution T-solve, which provides powerful cash and liquidity visibility and forecasting functionality and other treasury management capabilities. Please contact us to learn more and we would be glad to assist you overcome your business challenges. In the meantime, stay safe and vigilant.