The Governor of the Central Bank of Cyprus, Christodoulos Patsalidis, highlighted the challenges but also the opportunities facing the banking system in an environment of global uncertainty and new risks, in the context of the "Credit Risk Management Conference - ESG Impact on Credit Risk".  Referring to the new requirements to deal with environmental, social and governance-related (ESG) risks, the Governor of the Central Bank emphasized the importance of adapting banks to these new risks, which directly affect credit ratings and require from financial institutions a more comprehensive analysis of resilience of borrowers.He noted that banks are now required, during the loan origination phase, to conduct a more comprehensive assessment of how these emerging factors affect a borrower's creditworthiness.  As he explained, environmental risks, such as the increasing frequency of extreme weather events, the accelerating effects of climate change or the global shift towards regulatory frameworks promoting the green transition, can directly affect a borrower's creditworthiness and resilience.  Mr. Patsalides also noted that social factors as well as governance factors are also gaining weight in credit risk assessment. He added that issues of social sensitivity, such as work practices, social profile, employee welfare and social inclusion, can affect an organization's reputation and standing, having a direct impact on its turnover. He also said that governance risks, including transparency, corporate ethics and accountability, are equally important, as poor governance can lead to legal challenges, reputational damage and, ultimately, serious financial losses, which can make the viability of an organization doubtful.  He added that geopolitical risks, as well as the resulting deepening of protectionism, could fundamentally affect credit risk by destabilizing markets, impeding smooth trade practices and disrupting supply chains.  Mr. Patsalidis also mentioned that the threats also extend to the internet and infrastructure, putting the banking system in a new arena where it is faced with risks that may threaten its very viability.  The Governor stated that banks are now putting more emphasis on understanding how new risks, which emerge through the current period of intense uncertainty on a variety of fronts, can change key parameters of a loan's credit risk.  "In this way, banks seek to more effectively manage their exposure to credit risk while aligning their portfolios with the need to transition to a more sustainable and green economy as well as an environment rife with volatile factors and risks," he noted. This approach, he added, is fully in line "with the pressure we as supervisors are exerting as well as with the expectations of the investing public, since the market as a whole expects more and more transparency and accountability in the way financial institutions incorporate the due to risks in the decision-making processes".  Referring to the challenges of integrating these risks into banks' risk management practices, he said the main one is the lack of quality and reliable data.  "Although financial institutions are increasingly aware of the need to incorporate these risks into their credit assessments, inconsistent or incomplete publications and data are holding back the whole process," it said.  He added that small and medium-sized enterprises in particular, which make up the lion's share of Cypriot banks' loan portfolios, lack standardized methods of reporting these factors, making it difficult for banks to accurately assess their risk profile. That said, even when data and information is available, particularly for larger borrowers, there is often an inherent difficulty in incorporating it into the traditional credit risk analysis models that lending institutions typically use.  “The need for forward-looking data is another critical issue of key importance. Traditional risk models rely on historical data to predict future risks, but emerging risks – especially those related to climate change and geopolitical instability – often require predictive models that go beyond past trends,” said Mr. Patsalidis.   (ICE BEIRUT)

Fonte notizia: strategist.cy