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The Impact of the Covid-19 Pandemic This report summarizes the changes in credit Consensus in the creation of credit Consensus , with a focus upon
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on the Global Financial Network of different groups of financial counterparts as well as the delivery of actionable information in the credit
their current credit distribution and any migration from space. We also understood that there was another
The impact of the Covid-19 crisis to the global financial investment grade to high yield. way of looking at the credit process and its outputs.
network has accelerated the downward transition of We realised that “credit” can be a proxy for “liquidity” [The new Basel Accord]
creditworthiness at a rate comparable to the 2008 Shortly after the Covid-19 pandemic hit, Credit and that the process that is undertaken to determine regulation will not just
Global Financial Crisis. In the intervening 12 years, the Benchmark was asked to provide aggregated and creditworthiness of an entity was effectively one that
credit markets have been relatively benign as Central anonymised data to HM Treasury and The Bank of determined the propensity or willingness to extend impact the regulated
Banks, regulators and policy makers have followed England to help support the decision-making process liquidity to that entity. The liquidity related questions banking community
policies designed to achieve that objective. behind the innovative Covid Commercial Financing underlying this thinking are all dependent upon the
Facility (CCFF). We are proud that the credit data is credit analysis and go something like this: Should I lend but also have sweeping
Today, the world faces an uncertain and increasingly being used to help provide solvency, assist corporate to this entity? Yes or no? If yes, how much? For what ramifications for all asset
malign credit environment despite the efforts of survival and protect jobs in the real-world economy. term? And at what price?
the Governments around the globe to stabilise their This application of the data confirmed to us a long-held owners as well as for the
economies. The extent to which that transition is thesis that credit risk data can also be a legitimate proxy broader capital market
underway can been see in Figure x below . This table for liquidity and solvency related decisions. The Pending Regulatory Framework
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shows the credit transitions in the banking sector across
a fortnight – showing a significant rate of transition with Until relatively recently Credit Benchmark’s primary At the end of March 2020, the Basel Committee
a bias towards downgrades. purpose was as a data analytics company specialising announced a delay in the implementation of the
new Basel Accord enabling banks to focus additional aggregate output floor, which will require a bank’s
¹Credit Benchmark 2020, Financial Institutions Credit Risk Monitor, Credit
Benchmark, downloadable here operational capacity on responding to the impact of risk weighted assets (RWA), using an internal rating
Covid-19. Whilst this extra year of planning is to be approach, to be not lower than 72.5% of RWA as
Fig 12: Extract from Credit Benchmark Bank and Non-Bank Financial Institutions Risk Monitor June 2020 welcomed, the scale of the challenge for the securities calculated by the Basel framework’s standardised
financing industry in preparing to meet this new approach. Although the Basel accord has drawn up a
regulatory framework should not be underestimated. transition process which kicks in at 50%, the increase
Credit Consensus Changes Credit Consensus Distribution
in RWA allocated for securities financing as a result
This regulation will not just impact the regulated banking of these changes is expected to increase by as much
Banks Total Deteriorations Improvements IG To HY aaa aa a bbb bb b c
community but also have sweeping ramifications for all as forty-fold. The new rules in effect limit the ability
asset owners as well as for the broader capital market. of banks to apply internal rating models for RWA
Central Banks 112 9.8% 6.3% 1 17 13 17 17 26 17 5
Now is the time to begin preparations and identify purposes. Additionally, the standardised rules state
Globally potential solutions to mitigate their dramatic impact. that unrated obligors will attract a 100% risk weight
Systemically 30 6.7% 6.7% 0 7 21 2
Important Banks allocation. This affects thousands of high-quality but
One of the rules that most affects the securities unrated pension and mutual fund counterparties that
Banks - Global 2026 10.3% 2.9% 16 2 63 624 691 455 151 40 financing industry is the introduction of the most market practitioners think ought to attract a
20% risk weight instead.
Banks - North 311 13.2% 0.3% 12 2 12 109 159 27 1 1 ²By bringing together the internal credit risk views of the world’s leading
America financial institutions, Credit Benchmark provides an independent and
unique measure of credit risk. The data contributed by our partners Credit Benchmark estimates that the savings possible
Banks - Latin 146 37.7% 0.7% 0 8 54 67 6 11 is subject to rigorous internal ratings systems and/or strict regulatory by the reduction of the cost of capital from a 100% risk
America requirements. Credit Benchmark anonymizes and aggregates the
data before releasing it in the form of Consensus ratings (“CBRs”) and weight to a 20% risk weight could be up to 2 million
aggregate analytics. Entity-level credit risk information is available when
Banks - Emea 1057 7.7% 3.5% 9 37 316 300 274 102 28 USD per notional 1 billion USD of exposure. The basis
a minimum of three observations are contributed on that particular entity.
The rule of three applies to ensure the anonymity of those contributing of this estimation and the underlying assumptions
credit views to the Credit Benchmark dataset. Basing a Consensus are outlined below in Figure x - making this issue too
Banks - Apac 509 6.3% 3.7% 2 14 191 177 85 42 rating on a minimum of three separate observations prevents reverse
engineering and enrichens the depth of the data. expensive to ignore.

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