COVID-19: Measuring the Impact of a Black Swan

The Need for a Quantitative View

Many compare the current COVID-19 pandemic and its consequences with the global financial crisis of 2008-09. The key difference this time is that banks were not the source of the problem. Instead, they count among the casualties of the fallout from COVID-19, which has triggered a steep economic downturn and extremely severe market conditions. Already suffering substantially from low yields and high regulatory costs before the pandemic, they will find it difficult to stomach a sharp increase in the cost of risk that will ultimately result from the new credit cycle.

These (qualitative) statements appear to be commonly accepted and have found their way into industry and political debates. However, quantitative estimates and simulations on publicly available data are harder to come by. To fill this gap, we have put together a new study to provide transparency across a number of banks and banking groups. This fact-based data is essential to any mitigation plan. Otherwise, you might risk doing more harm than good.

Our analysis focuses on credit risk first. This is not to say that market or funding risks will not be important today or in the near future. However, the size of the problem becomes clear when looking at this very unique challenge alone.

Simulating the Impact of COVID-19: a 3-Step-Approach

We start our analysis by looking at the financial resilience of a sample of European banks pre-COVID-19, focusing on capital and profit cushions. Naturally, bank positions differ widely. 



Risk absorption potential. Prior to COVID-19, leading European banks’ ability to absorb losses and higher costs of risk varied significantly:


Secondly, we analyze banks’ corporate and retail credit exposure. Corporate loan books require a more detailed analysis, because the impact of COVID-19 on different industry clusters is likely to vary greatly: for example, healthcare will almost certainly be less affected than hospitality. For each industry cluster, we calculate a COVID-19 impact score based on companies’ (pre-crisis) financial health and our impact assessment. We have examined over 18,000 companies in Europe to ensure a strong evidence-based and comprehensive understanding of the pandemic’s effect on corporate customers.

An indication of the severity of COVID-19’s impact on banks can be estimated by mapping their financial resilience against the size and estimated impact of COVID-19 on the corporate loan book. The resulting heat map provides a glimpse of which banks may need to be scrutinized more closely.



Initial mapping. Estimated impact within the corporate loan book against banks’ overall financial resilience reveals significant potential impact:


Lastly, we outline two possible pandemic scenarios and translate this information into individual loss expectations for each bank and—depending on their individual loan book structure and specific industry exposure—we derive simulated values for additional loan loss provisions. We have identified three clusters of banks which require significantly different remedial treatment.

We conclude the study with examples of current measures per cluster by bank managers as per an initial industry feedback from 60+ conversations on this subject.

If you are interested in the study and the methodology we used for our analysis, please don´t hesitate to contact us.   

Feel free to contact us


Dr. Ekkehardt Bauer

Senior Manager