Impact of coronavirus on operational risk: ORX News round-up

  • 2 November 2020

As the effects of coronavirus (Covid-19) spread across the globe, ORX has decided to provide a round-up of the operational risk impacts of coronavirus on financial institutions worldwide to help you manage this risk.

These summaries and stories are sourced by the ORX News service, and cover significant new developments and media stories. Follow the links to read the articles in full.

Latest coronavirus & op risk news:

Updates, 02 November

Impact on operations

Italy: CheBanca! moves to allow access to branch network by appointment only, 23 October

Shock for borrowers as Kenyan banks demand hidden interest

AllAfrica reported on 19 Octobeer that a number of customers who took repayment holidays on their lending arrangements are being hit with surprise interest bills. In March 2020 the Central Bank of Kenya announced that repayment holidays would be available to those who were struggling due to the coronavirus pandemic, many borrowers rushed to take advantage of the measures. However, many customers are now accusing the lenders of failing to adequately explain the terms of the repayment holidays, and now find themselves faced with unexpected bills for accrued interest.

Lockdown effect on Italian insurance -premiums down 9%

The president of the Institute for the Supervision of Insurance (IVASS), Daniele Franco, has said that in the first half of 2020 the total premium income for insurance companies has fallen by 9%, from €70 billion to €64 billion. He explained that this “is mainly attributable to the life sector”, reports la Repubblica on 19 October. Additionally due to restrictions on movement, motor insurance premiums also fell in the same period.

Pandemic leads to greater financial inclusion in Brazil

Data from the Brazilian Central Bank indicates that almost 10 million people started their relationship with a financial institution since March. According to Folha de S.Paulo on 18 October, there has particularly been growth in the number of customers utilising digital services, likely due to the impact of social distancing on branches, and the payment of government aid schemes via digital accounts. It is estimated that upwards of 36 million Brazilians remain outside the financial system, facing issues such as a reduced branch network, unfamiliarity with technology, and lack of internet access.

Lloyds of London reviewing insurance policies

On 12 October, Reuters reported that Lloyd’s of London would be reviewing how insurance products are designed and sold in light of the coronavirus pandemic. Many insurers have faced court cases due to complex language and difficult to interpret policies for business owners, with a lack of clarity on whether disruption due to the pandemic is covered. Lloyd’s laid out a recommendation for simpler products and policy documents.

Reinsurers faring well through pandemic

The “big four” European reinsurers (Swiss Re, Munich Re, Hannover Re, SCOR) have maintained strong capital adequacy throughout the coronavirus pandemic, according to Insurance Business on 12 October. However, these firms have seen their earnings suffer to varying degrees, depending on their particular exposure in certain markets – for example Swiss Re and SCOR have seen large amounts of mortality claims due to their large market share in the US.

Actions to help clients

Community savings groups affected by pandemic

Local savings groups, in which members of the community pool their savings funds to lend to members have seen a number of changes as a result of the coronavirus pandemic. In particular, restrictions on meetings and economic pressure have hampered members ability to continue contributing to their savings funds. According to Agence Ecofin on 19 October, there are nearly 750,000 savings groups worldwide with more than 15 million members in 73 countries. For savings groups linked to financial institutions this can mean even more difficulty for members in accessing their savings, with many members living large distances from banks. Digitization of financial services is presented as a solution for supporting these savings groups.

Central Bank of West African States extends period for pandemic loan repayment deferrals

AllAfrica, 19 October

Botswana: FNBB announces coronavirus loan guarantee scheme

The First National Bank of Botswana (FNBB) and the government of Botswana will implement a loan guarantee scheme in order to alleviate the economic impact of the pandemic. The government will act as a guarantor for loan applications via FNBB, and the scheme will be administered by Botswana Export Credit Insurance. The government will act as guarantor for up to 80% of the loan, and businesses will be eligible to borrow up to BWP25 million. The Monitor reported on 12 October that most businesses are eligible to apply, except those that are partially government owned or state-aided.

Low rates of approval for South African loan scheme

After the initial launch of the pandemic loan scheme in South Africa in May, performance was viewed as poor – leading to a refresh of the scheme in August. However, according to Business Maverick on 12 October, the amended scheme is also struggling to provide funds to businesses. The value of loans approved and disbursed to date totals ZAR 16.08bn, despite an agreement between the banks and the government to make available ZAR 67bn, with the potential to increase up to ZAR 200bn.

Chile: Mentoring to help over a thousand SMEs with coronavirus business loans

On 29 September, Pura Noticia reported that the president of BancoEstado had launched an initiative that would see the bank provide specialised support and business advice to SMEs. management, digital marketing, design and communications, ideally with practice in mentoring programs.

Heightened risk

Italy: coronavirus subsidy scams on the rise

According to on 19 Oct, 10 people in Scido were found by the police to have defrauded the government relief programmes.

Milwaukee pension fund sues Allianz for $268m loss

On 16 October, Law 360 reported that a pension fund for Milwaukee City employees had filed a suit against Allianz Global Investors, claiming that “negligent mismanagement” caused the pension fund to lose at least $268m on its investments. AllianzGI is also facing suits over the Alpha Funds from New York's Metropolitan Transportation Authority pension and benefit plans, a Teamsters union retirement plan, and a Blue Cross Blue Shield employee benefits committee.

Wells Fargo fires workers for abusing coronavirus aid programmes

Wells Fargo has sacked more than 100 employees believed to have defrauded the Small Business Administration’s (SBA) Economic Injury Disaster Loan (EIDL). On 14 October, Bloomberg reported that the SBA’s inspector general had found evidence of fraud in the program, with more than $250m given to potentially ineligible recipients and a further $45.6m in possible duplicate payments.

Hospitality group sues insurer over $40m in virus losses

The Briad Group (who own more than 120 hospitality franchises, including some Wendy’s, TGI Friday’s, Marriot, and Hilton) have filed a suit against a Zurich American Insurance subsidiary. The group suffered more than $40m in losses, due to forced closures during the coronavirus pandemic, and say that American Guarantee and Liability Insurance breached the insurance contract by failing to pay the damages, according to Law 360 (paywall) on 13 October.

Pandemic exposes design flaws in bank capital buffers

On 12 October reported that capital buffers are not working as they should during the coronavirus pandemic. The European Central Bank (ECB) said the release of capital buffers would free up more than €20bn of Common Equity Tier 1 (CET1) capital at systemically important banks. The top tier of banks had permission to effectively cut their CET1 ratios by over one-third. As of the end of the second quarter, though, the weighted-average CET1 ratio of 147 European banks was 14.7%, down just 20 basis points from end-2019 – and actually rose between March and June. A number of potential reasons for low utilisation of the buffers were highlighted including concerns about future credit losses, and doubt about the ability to replenish these buffers.

Banks warn of rise in ransomware attacks

According to (paywall) on 9 October, banks are saying that the threat of cyber-attacks, such as ransomware, has risen due to the increased number of entry points with staff working remotely. Speaking at OpRisk Europe Lester Joseph, manager of the global financial crimes intelligence group at Wells Fargo described “an epidemic of financial crime around the world” in response to the coronavirus pandemic. Banks are encouraged to train staff around the risk of phishing and other methods of introducing ransomware into their systems. This follows a report from Interpol in August showing an “alarming” rise in cyber-attacks during the pandemic, including phishing emails, malware and data compromise.

Financial stability & regulatory

UK regulator warns banks over remote working conduct rules

Reuters reported on 12 October that the Financial Conduct Authority (FCA) had stated that banks had a responsibility to apply the same standards of surveillance and conduct to remote workers and those in the office during the pandemic. Particular attention is being given to how sensitive information is being handled, and information that could be considered “inside information” with regards to business operations.

UK tax agency will get back to tax investigations following time spent supporting pandemic support plans

Financial Times, 8 October

Brazilian banks fined for not extending their opening hours to enable customers to social distance

PROCON, a major consumer protection agency in Brazil has fined bank branches in Santa Catarina BRL240,000 for refusing to extend their opening hours, according to on 6 October. In March, the Central Bank of Brazil made a resolution in response to the pandemic which would allow banks to reduce their hours without giving 30 days notice, and exemptions from the minimum service hours. As a result of a reduction in hours, queues began to form which prevented adequate social distancing, and as a result PROCON instructed the banks to remain open from at least 10am to 4pm.

Bank of England (BoE) may update resilience guidance post-pandemic

According to (paywall) on 6 October, a senior advisor at the BoE has suggested that the UK regulator may refresh the guidance on operational resilience in light of the coronavirus pandemic. Speaking at OpRisk Europe, Nick Strange, senior technical adviser for operational risk and resilience at the UK’s Prudential Regulation Authority, said “We don’t envisage any changes to the underlying principles, but there is some detailed guidance in the consultation paper which we’d need to have a look at and see whether or not that’s still appropriate”.

Updates, 30 September

Impact on operations

Portuguese banks undergo major re-structuring including redundancies and branch closures as a direct impact of the pandemic, 28 September

Allianz ends pandemic protection in new property and accident policies

The coronavirus crisis has caused high losses to the insurer in the first half of the year, reports on 23 September.

Goldman Sachs and JPMorgan face coronavirus cases after workers return to the office

CNBC, 18 September

Barclays traders in London sent home after testing positive for coronavirus, 17 September

Reinsurer Munich Re suspends sales of policies with pandemic protection, 11 September

Kenyan commercial banks lose Sh19.48bn in the first half of 2020 because of coronavirus impact on loan defaults

Business Daily Africa, 8 September

Insurer Momentum Metropolitan revises targets as earnings halve, 9 September

Lloyds of London expected to pay £5bn in coronavirus claims

Insurers at Lloyd’s are facing pay outs on a wide variety of policies, including event cancellation and business interruption, the Financial Times reports on 10 September.

Barclays withdraws mortgages after nearing lending limit to higher-risk borrowers

The bank reduced the maximum customers could borrow from 5.5 times income to 4.49 times without notice. The change affected borrowers who had already agreed mortgages, putting some property purchases at risk of collapse, the Financial Times reports on 10 September.

Private equity firms Blackstone and Advent pay for coronavirus tests and taxis to bring staff back to work

The Financial Times, 7 September

South African Insurer Santam suspends dividends whilst waiting to see how big lockdown claims will be

The insurer has already set aside a claims provision of R1.3bn for business interruption exposure, reports on 3 September

Italy: households and business applications for moratorium on loans exceed €300bn

Bank of Italy, 2 September

Actions to help clients

Banco Central do Brasil launches anti-fraud campaign following 60% increase in cybercrime targeting elderly customers 

8 September

UniCredit and the European Investment Bank (EIB) provide €200m for Italian SMEs and Mid-Caps through the pandemic

7 September

UAE health insurer Daman launches bot to fight coronavirus

Middle East Insurance Review reports on 7 September that Daman and Microsoft have collaborated to launch a bilingual health bot to assist patients with coronavirus symptoms self-assessment

Heightened risk

The European Central Bank (ECB) urges to extend moratoriums but warns of risk of €1.4trn generated in bad loans

El Confidencial, 29 September

German insurance associations warn of consequences of ending credit insurance protection

The credit insurance protection was agreed in April and will expire in December, reports on 28 September.

Bangladesh Bank extends timeframe for loan repayments until December, 28 September

UK: Fraudsters take advantage of government-backed loan scheme

The Bounce Back Loan Scheme (BBLS) was announced in April and intended to help small businesses during the crisis. The loans are 100% backed by the government and do not have to be paid off for six years. They are interest free for the first 12 months, and are administered by 12 banks. The BBC reports on 27 September that criminals have been stealing identities and setting up businesses in the victims’ names to obtain the loan. They claim up to £50,000 on each application.

Banco Itaú branch fined for breaking social distancing rules and allowing customers to queue in crowded conditions, 14 September

Australia: rise in scams targeting pandemic and natural disasters

Sydney Morning Herald, 14 September

JPMorgan fires employees who took coronavirus relief funds

According to the Financial Times on 10 September, JPMorgan employees improperly applied for and received money under the Economic Injury Disaster Loan (EIDL) programme, which offered grants of up to $10,000 and low interest loans to businesses hurt by the pandemic.

German insurance sector expects increased fraud as a result of coronavirus, 2 September

South African insurer Old Mutual earnings drop by 67% due to coronavirus, 1 September

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ORX News coronavirus operational risk news round-up 02 November 2020

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